Best Stocks, Crypto, and ETFs to Watch – Coinbase, Home Depot, Cardano in Focus

Coinbase Global Inc. (COIN) reports Q4 2021 earnings after Thursday’s closing bell, with an expected profit of $2.16 per-share on $1.98 billion in revenue. The stock came public at 381 in April 2021 and topped out, ahead of a decline that broke 8-month support at 215 in January. It’s now trading just 30 points above the all-time low at 162.20, ahead of a Biden executive order that lays the groundwork for a government-wide strategy to regulate digital assets. A sell-the-news reaction is likely throughout the crypto universe.

Home Depot Inc. (HD) reports Q4 2021 results on Tuesday, with analysts looking for a profit of $3.18 per-share on $34.85 billion in revenue. If met, earnings-per-share (EPS) will mark a 20% increase compared to the same quarter last year. The stock hit an all-time high at 420.61 in December and sold off, entering a correction that’s now relinquished 16% year-to-date. Price action has been testing 200-day moving average support for the last month, raising the stake ahead of this week’s confessional.

Virgin Galactic Inc. (SPCE) fell apart in October after delaying the first tourist space flight by one year, citing design issues. The decline pierced May support in the mid-teens in December, ahead of continued downside that ended within 70 cents of 2019’s all-time low in January. Ticket sales for the general public went on sale last week, triggering a round of excitement, followed by a deep fade. The stock could take another shot at higher ground after this week’s Q4 2021 release.

Cardano (ADA) has dropped 68% since posting an all-time high at $3.10 in September, undercutting par ($1.00) for the first time in 9 months. This is a critical price level, generating multiple 2021 recovery waves. It tagged support for the first time since July in January, yielding an uptick that booked little upside before sellers in force returned two weeks ago. The crypto hit an all-time low at $0.9146 over the holiday, raising odds that support has now become resistance.

iShares MSCI Emerging Markets Index Fund (EEM) has struggled since February 2021, dropping more than 15%. The selloff has tracked a declining channel, with resistance aligned at the 200-day moving average. The monthly Stochastic oscillator has just crossed into the first buy cycle since 2018, at the same time that Omicron is rapidly receding from the population. This harmonic convergence could signal a strong rally, potentially lifting the fund to an all-time high.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held Virgin Galactic in a family account at the time of publication. 

Better to Get Chinese Stock Exposure Through the iShares MSCI Emerging Markets ETF Instead of MCHI

At $62.9 per share, iShares MSCI China ETF (MCHI) is more than 70% under its February 2021 high. In contrast, the one-month gain of 3.4% shows that there has been a regain of interest by investors for this ETF which mainly provides exposure to the Chinese consumer cyclical, communication, financial, and tech sectors. In comparison, the iShares MSCI Emerging Markets ETF (EEM) which includes about 34% of Chinese assets is up by 3.8%.

Source: Trading View

My objective with this thesis is to understand the reason for this timid rise in the value of MCHI and whether there could be a more sustained upside. I first start with China’s central bank actions which could be beneficial to the ETF’s financial sector holdings.

China’s central bank actions

The People’s Bank of China (PBOC) which had previously taken a restrained approach to monetary stimulus, appeared to change its stance on December 25, when it pledged greater support for the real economy, stating that monetary policy will be more forward-looking and targeted. One of the intended aims would be to “promote the property sector’s healthy growth as well as work to better meet housing demand”. By that time, MCHI shares had reached their lowest point, and the PBOC’s statement did produce a temporary relief for investors.

Interestingly, the central bank’s more recent announcement about lowering interest rates by 10 basis points to 2.85% on Jan 17 constitutes a more concrete step and may preclude other such actions as Chinese authorities try to mitigate the effects of the Omicron variant, and address the downturn in the property sector.

Now, the fact that the PBOC is easing monetary policy despite China’s GDP expanding by 8.1% in 2021, supposes that the economy still faces headwinds. At the same time, the U.S. and the rest of the world are looking more towards tightening. Thus, the PBOC may have a narrow window of opportunity to provide stimulus before it has to start tightening again. Hence, while there are near-term positives for MCHI’s bank and industrial holdings, the longer-term picture looks more uncertain.

Some big investors favor China for investment

Now, REITs constitute just 4% of MCHI’s holdings and the ETF provides exposure to giants like Alibaba (BABA), also referred to as the “Chinese Amazon (AMZN)”. Interestingly, Charlie Munger, the vice-chairman of Berkshire Hathaway (BRK.B) controlled by Warren Buffett has augmented his stake in Alibaba during the recent months. Now, Berkshire is considered as the “epitome of value”, and for this matter, MCHI’s uptrend also somewhat coincides with the rotation from growth to value stocks which has been gaining momentum from the beginning of this year.

Source: iShares.com

Along the same lines, billionaire investor Ray Dalio, who has reportedly raised $1.3 billion for its third China fund according to the Wall Street Journal is highly optimistic that the Asian country is winning the economic race against the U.S.

Now, Dalio’s remarks have sparked some controversy. To this end, those who have invested in Chinese tech and educational technology companies know something about the propensity of authorities in that country to bring in abrupt regulations, such as those implemented as from July last year. These quickly decimated the valuations of stocks operating in these sectors.

Exploring further, Dalio’s remarks are reminiscent of the 2005-2006 period when the U.S. had dropped from 4th to 13th position in the global rankings for broadband internet usage, all at the benefit of Japan and South Korea. At that time some Wall Street gurus predicted that this drop would result in the U.S. losing in productivity and innovation. Eventually, these predictions never materialized and twenty years later, the U.S is home to the biggest tech companies the world has ever known.

Thus, basing an investment solely on the moves of big investors makes no sense and anyone investing in China should be aware of the risks.

The risks

First, the delisting fears whereby NYSE and NASDAQ listed Chinese firms will be all removed and relisted in Hong Kong appear overblown as even if a stock delists from the U.S., possibly as a result of Chinese authorities stepping up supervision, it would eventually be converted to Hong Kong Stock Exchange shares, so one still owns the company. This was the case with ride-hailing group Didi Global (DIDI) at the start of December last year, but news about the event still trimmed some percentage points off MCHI’s share price.

Second, both the US and China are heavily invested in each other as the two countries’ supply chains are highly interdependent. On the one hand, with American citizens depend to a large extent on consumer items from China, and on the other, the latter’s factories depend on capital goods like semiconductor producing equipment from the U.S. Now, semiconductors remain highly sensitive items and the U.S. has brought in legislation which limits the type of chips which can be exported to China, out of fear that the Chinese military may use these to produce sophisticated weapons. These could be used against Taiwan, one of America’s strategic allies in the region.

Better to go for partial exposure through EEM

Therefore, in addition to economic and regulatory uncertainty within China itself, there are geopolitical risks that can impact the country’s trade with the U.S. This can result in MCHI becoming highly volatile. However, China remains the second largest economy in the world and value investors like Charlie Munger and venture capitalists like Ray Dalio have been in the game since a long time. Consequently, from the balanced risk perspective, partial exposure to Chinese stocks, either individually, or through an ETF start to make some sense.

Thus, for those wanting exposure to some of the specific Chinese tech names like Tencent (TCEHY) and Alibaba which are significantly undervalued with respect to their western counterparts, there is the EEM alternative, which is also diversified in Taiwanese, South Korean, Indian stocks as well as other countries. The ETF’s holdings should benefit from record high U.S. inflation favoring cheaper alternative products from emerging economies. This said EEM has a slightly higher expense ratio of 0.68% compared to MCHI’s 0.57% but has shown a better one-month performance.

EWY: Take Advantage of USD/KRW Strength to Trade the South Korea ETF

EWY encapsulates South Korean stocks with some global semiconductor names, while KRW/USD is the ratio of the South Korean Won to the U.S. dollar or the inverse of the USD/KRW currency pair. The mighty dollar is currently on an uptrend encouraged by a hawkish Fed and the U.S. economic recovery being well on track.

https://static.seekingalpha.com/uploads/2022/1/10/49663886-16418344883060296.png

Source: fxempire.com

Now, the USD/KRW pair forms part of the top 10 most traded currency pairs as part of the foreign exchange (Forex) market, which is larger than all stock markets of the world combined, but, whose volatility is only second to Bitcoin’s.

Many professional Forex traders trade this currency pair which, as seen by the abrupt fluctuations carries volatility risks, but, depending on the right timing, can also be synonymous with opportunities. Here, the undervaluation of the Won against the U.S. dollar signifies that there is potential for an FX gain since EWY shares are USD denominated while portfolio holdings are in the local East Asian country’s currency.

Pursuing further, South Korea was the first developed nation to raise its interest rate on August 26 by 0.25% to 0.75%. With the Bank of Korea (BOK) also incrementing its inflation projection from 1.8% to 2.1%, there could be further hikes. Now, with the U.S. and China being South Korea’s two main trading partners and the fact that both countries’ currencies have appreciated against the won, means that it may be easier for central bankers to drive another rate hike while still downplaying high interest risks for South Korea’s export-driven economy.

Assessing economic growth, the South Korean economy rebounded strongly from 2020’s Covid slump, which translated into EWY’s main holdings witnessing strong revenue growth as from July 2020.

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Source: Ycharts

Looking ahead, there may be some supply chain-related issues as well as inflation impacting the different sectors of the fund’s holding. Its over 37% exposure to IT is being adversely impacted by the contagion effect from Nasdaq’s fall. However, looking deeper, the IT names in fact consist of semiconductor plays like Samsung Electronics (SSNLF) and SK Hynix ( HXSCL) at 24.5% and 6.1% of overall assets respectively. In this respect, with chips being key components used in the manufacturing of everything from cars, electric batteries, solar panels to wireless 5G, its demand should persist for years despite the Korean government starting to reduce monetary stimulus. I also view the rate rise by the BoK for the purpose of normalizing policy as being more aligned with the economic recovery. It also comes at the right time in order to reduce macroeconomic risks like creating an asset bubble or letting household debt increase.

https://static.seekingalpha.com/uploads/2022/1/10/49663886-16418344883293347.png

Source: iShares.com

This said, to further support the fact that EWY constitutes an appropriate investment at this juncture is its underperformance of the iShares MSCI Emerging Markets Index Fund (EEM) (which includes holdings from China, Taiwan, and others in addition to South Korea ) by more than 10% for the last one year. As a result, based on its holdings, EWY is available at an average Price/Book Ratio of only 2.56 compared to 4.8 for EEM.

Finally, as a result of the sell-off in tech stocks, the Korean ETF could slide further, maybe to the $74.1 support level. Moreover, despite the BOK raising rates again in November, the Won has continued on its downtrend. This should prove beneficial for the country’s export-led economy and continue to promote revenue growth for EWY’s holdings.

Disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.