After a fairly quiet March, emerging markets came to life this week after the revelation of unexpectedly strong manufacturing growth in China, progress on trade talks and lower interest rates—which always help emerging markets.
This week we have a new recommendation that helps power emerging market consumer spending, a key driver as these markets transition from exports to consumer spending to fuel their growth.
Cabot Emerging Markets Investor 682
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Cabot Emerging Markets Timer
The Emerging Markets Timer is our disciplined method for staying on the right side of the emerging markets. The Timer is bullish when the index is above the lower of its two moving averages and that moving average is trending up.
Despite a choppy past few weeks, our Emerging Markets remains positive, depicting a continuing intermediate-term uptrend among the sector. The iShares EM Fund (EEM) had two tests of its uptrend during March, but each dip found support near its rising 50-day line, and the fund has pushed back toward its 2019 highs this week.
Things can always change; maybe the up-down-up-down action since early February is a sign that sellers are stepping up to the plate. But we always go with the evidence, and with the Timer and most individual stocks in solid uptrends, the odds continue to favor higher prices ahead.
Fintech Power Consumer Spending
I’m in London this week, which has regained its status from Wall Street as the center of world finance. Brexit might change things but it is good to keep in mind that it was London’s ability to access deep pools of capital that allowed an island nation to reign supreme over nearly a third of the globe for more than a century.
And the jewel of the empire was India, where citizens begin heading to the polls next week. The country’s 880 million eligible voters will cast their ballots over five weeks across a million polling places, with the results announced on May 23.
Prime Minister Narendra Modi’s nationalist BJP Party is projected to win the most seats, but will struggle to capture a majority. The primary opposition comes from the Congress Party, led by the heir to India’s most powerful political dynasty, Rahul Gandhi, with dozens of other parties in the mix.
Chinese stocks showed some relative strength this week as China’s manufacturing numbers ticked upwards—exceeding expectations. This was welcome news after a few months of weak data.
Someone mentioned to me this week that the European Central Bank is widely believed to be buying European equity ETFs. I was surprised to learn that Japan, Hong Kong and Switzerland had done this kind of thing in the past and may very well be doing it right now. All of this will put upward pressure on stock prices as the year progresses.
The Mystery of Capital
I’ve noticed that in addition to inadequate education, many talented people in emerging markets are held back by a lack of access to financing. By this I mean the basic building blocks of personal finance such as bank accounts, credit cards and mortgages.
This is especially true for young people just getting going in the race of life. Simple things that we take for granted such as getting a credit card can be a real challenge.
Hernando de Soto’s great book, The Mystery of Capital, explains why these small things depend on legal rights and transparent databases that are so critical to a capitalist economy.
But thanks to the widespread use of mobile phones in emerging markets, there has been rapid and creative growth in fintech – the intersection of financial services and technology.
Fintech is allowing emerging markets to leapfrog ahead rapidly.
Let’s take a closer look at one idea that will help us capture the rapid growth in this promising trend.
Featured Stock
New Recommendation: LexinFintech (LX)
Financing China’s Yuppies
In Asia many things are moving fast including young, upwardly mobile, tech savvy Chinese consumers.
And this is the case across most emerging markets.
Financial service platforms based on mobile phones are often referred to as “fintech.” This is an exciting, crowded, fast-growing market offering huge growth potential.
Our recommendation today, LexinFintech (LX), is growing at an incredible rate yet its stock trades at only ten times expected 2019 earnings.
LexinFintech Holdings operates as an online consumer finance platform for young adults in the People’s Republic of China.
The company operates Fenqile, an online consumer finance platform that offers personal installment loans, installment purchase loans, and other loan products, as well as Le Card credit line.
It also matches customer loans with diversified funding sources, including individual investors on its Juzi Licai online investment platform as well as institutional funding partners in its direct lending programs.
The company’s target customer cohort, educated young adults aged between 18 and 36 in China, features young people with high income potential, high educational background, high consumption needs, a strong desire to build their credit profile, and an appreciation for efficient customer experience.
During its most recent quarter, LexinFintech originated loans totaling about $2.5 billion U.S. dollars, 68% more than it did in the same quarter last year.
In terms of outstanding principal owed by its borrowers, the company’s loan portfolio almost doubled to $3.73 billion.
And LexinFintech now has 37 million registered users, an increase of 56% in the past year, and 10.5 million users with credit lines, up 39%.
Fourth quarter adjusted net income was up 473% year over year and for all of 2018, net income was up 439%.
In terms of risk, the key issue to watch at LexinFintech is credit quality, but it looks like they have a good system in place and are adequately reserving for unexpected credit issues.
The other possible risk is regulatory changes by the mandarins in Beijing. This is less likely to be a problem given the national agenda of moving to a more consumer-oriented economy.
There are two final points in favor of LX. First, there is no reason the company cannot take its system and platform to other Asian and emerging markets. And second, given its growth and rising profile and low valuation, LX seems to me to represent an ideal takeover candidate. BUY A HALF.
LexinFintech (LX)
CES Tower
27th Floor No. 3099 Keyuan South Road Nanshan District
Shenzhen 518052
China
http://www.fenqile.com
Model Portfolio
Updates
Alibaba (BABA) began the week up 5% but then gave most of it back yesterday after Yahoo announced that its spin-out Altaba is selling its entire Alibaba stake. In the long-term, that’s nothing.
The big story is that Alibaba is becoming a huge company and in many ways an investment holding company. Just this week it announced that it is acquiring Teambition, a competitor to Slack, and last week it announced an expanded stake in ride sharing and an interest in seafood markets.
For new members, we recommend beginning with a small position at this time. BUY A HALF.
Baozun (BZUN) has made an impressive move over the last week from $38 to $44 and quite clearly has recovered from a bout of Chinese tech stock weakness and is in a solid uptrend. The market seems to be recognizing that the higher expenses in the last quarter are investments in future growth.
Baozun’s investments in its platform and new cross selling opportunities will improve product mix and revenue. On the valuation side, the company expects $1 billion in revenue for 2019 yet has a market value of only $2.4 billion. BUY A HALF.
Daimler (DDAIF), this recent recommendation is up 10% this past week. This is a high quality, value play on emerging markets with the added bonus of a 7.8% dividend yield. China’s Geely is nearing a deal to buy a 50% stake in Smart, Mercedes-Benz’s small-car division. Daimler is in an uptrend over the past two weeks but I encourage new subscribers to add some shares to their portfolio. BUY A HALF.
Sea Limited (SE) continues to consolidate its gains after surging in early March. This Tencent-backed company should continue to benefit from strong growth in Southeast Asia.
The company’s digital entertainment segment saw revenues climb roughly 63% to reach $241.3 million in the last quarter. Growth for the company’s online retail business was even higher. If you didn’t buy on our original recommendation, take advantage of this pause and take a half position. HOLD A HALF.
TAL Education (TAL) shares made some ground this week but not much relative to other China stocks. There has been no negative news but this relative under-performance is something to keep on eye on. I’m hopeful the stock is forming a base to move on to the next level. TAL offers comprehensive tutoring services to students from pre-school to the twelfth grade, personalized premium services, and online courses; its learning center network currently covers over 50 key cities in China.
If you’re not yet in, you can buy a half position here or on any dips. BUY A HALF.
Tencent (TCEHY) breached the 48 level as Beijing’s mandarins approved a new round of games including “Game of Thrones.” This is on top of the nine new games that were approved in the first quarter following a painful Chinese license freeze due to a regulatory crackdown. For a company of its size, growth is still impressive; in 2018, social and other advertising revenue was up 55%, digital content subscriptions rose 50% and total revenue jumped 32%. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) is up 18.7% since we highlighted this ETF in a special report early this year.
REMX remains a hedge against U.S.-China tensions and a play on rare metals and rare earths that are undervalued and underappreciated given their importance to high tech products and markets. We still like REMX and recommend holding on to your position. HOLD A HALF.
ZTO Express (ZTO) performance has been a bit of a disappointment despite its recent strong quarter. I believe this stock presents us with good value and significant upside as the company should benefit from positive outcome of U.S.-China trade talks.
Based in Shanghai, ZTO is one of the largest express delivery companies in China, offering its services to millions of traditional merchants, e-commerce sites, and online sellers covering 96% of China’s cities and counties.
Finally, ZTO’s board has authorized a new $500 million share repurchase program. If you are not yet on board, I encourage you to buy a half position here. BUY A HALF.
Watch List
NIO (NIO) shares found a bottom at 5 and have firmed up a bit over the past week. Additionally, the company this week released delivery numbers in the first quarter that marginally exceeded expectations.
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All Cabot Emerging Markets Investor buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT EMERGING MARKETS INVESTOR ISSUE IS SCHEDULED FOR April 18, 2019
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Cabot Emerging Markets Investor is published by Cabot Wealth Network, an independent publisher of investment advice since 1970. Neither Cabot Wealth Network, nor our employees, are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. © Cabot Wealth Network 2019. Copying and/or electronic transmission of this report is a violation of the copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, visit www.cabotwealth.com, write to support@cabotwealth.com or call 978-745-5532.
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