Meet the China Trade War Winners and Losers

What’s the biggest fear on Wall Street these days?

For starters, a “sell-the-president” reaction in markets now that Donald Trump is officially in office. Beyond that, though, one of the biggest fears is that of a trade war with China.

In my view, as a rule, any type of war is almost never good. (Although certainly sometimes necessary.) That premise also applies to a trade war.

Like actual wars, trade wars are ugly and messy. And, like actual shooting wars, the real victims are the average citizens/consumers of both countries.

That’s because consumer choice is always the victim of a trade war. Especially if that war includes salvos such as tariffs, import/export restrictions, and other punitive measures against nations.

The prospect of a nasty trade war with the No. 2 economy in the world is something that’s a justified fear now that Donald Trump has moved into office. After all, the president based a lot of his campaign on criticizing international trade deals, and particularly unfair trade with China.

In fact, in his first full day in office, President Trump signed an executive order formally ending the United States’ participation in the Trans-Pacific Partnership.

Mr. Trump clearly means business on the trade front. So, what happens to the stocks most-affected by a trade war with China?

If you’ve been reading the Afternoon Edition over the past few weeks, you’ve likely seen several articles about the potential China trade war.

Our articles “Trump: The Two Sides of a Chinese Coin” as well as “China Warns Trump About a Trade War” looked at different aspects of this issue. Here we examined some of the potential winners and losers in the wake of such a trade war. We also published many of your responses in our follow-up issue “Sounding Off on the Latest China/Trump Trade Thoughts.”

Today, I want to present Wall Street’s thinking on the issue, and we’ll do so by looking at a story published in Bloomberg: “These Companies Are at Risk in a U.S.-China Trade War.”

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According to the piece, if there is a trade war between the U.S. and China:

 … China will retaliate against any protectionist steps — not only are there reported contingency plans, but the historical example of measures against Japan when tensions flared in 2012.

Widespread boycotts of American products in China could hit brands including Nike Inc., General Motors Co., Ford Motor Co. and Tiffany & Co., while U.S. sanctions would put Chinese electronics exporters such as Lenovo Group Ltd. and ZTE Corp. under pressure, according to Credit Suisse Group AG. Domestic competitors stand to gain from diminished commerce.

If you think that sounds uncomfortable, well, I agree. Yet it doesn’t sound as uncomfortable — and as downright scary — as what would happen if one of Candidate Trump’s trade war proposals were enacted.

Recall that during the campaign, Trump floated the idea of a 45% tariff on Chinese imports. If that happens, China would retaliate. And according to Morgan Stanley analyst Jonathan Garner, that would have a pernicious effect on Chinese stocks.

Garner speculates that this could cause the MSCI China Index (the benchmark measure of large-cap China stocks) to fall by as much as 30% from current levels.

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So, who would be the biggest victims if this war ignites?

According to Reto Hess, head of global equity research at Credit Suisse, China’s producers of consumer electronics, apparel and household appliances could be among the biggest losers.

The graphic below, which appeared in Bloomberg, names the companies most likely to suffer, as these are the firms with the most U.S. exposure.

Chinese companies GoerTek, Regina Miracle International, Li & Fung, WH Group and Lens Technology have the most U.S. exposure. Image credit: Bloomberg

The likelihood of stocks with the most U.S. exposure going down in a trade war is somewhat intuitive. However, what isn’t as intuitive here is that China’s domestic stocks could be the big beneficiaries.

We highlighted the Global X China Consumer ETF (CHIQ) in our “China Warns Trump About a Trade War“ article, as this ETF is focused on Chinese companies that do business primarily domestically.

This fund would likely see a move higher if China and the U.S. actively engage in trade combat.

Meanwhile, U.S. companies with the biggest exposure to China also would likely suffer from the trade tensions.

The graphic below names the names most at risk for direct trade war damage, as they have the most sales from China.

Ambarella (AMBA), Texas Instruments (TXN), Marvell (MRVL), Genco Shipping & Trading (GNK) and Diana Shipping (DSX) top the list as having the most sales from China.

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Finally, which country’s stock market has the most to lose from a full-blown trade war between China and the U.S.?

Here’s how the Bloomberg piece puts it:

Overall, U.S. equities have more to lose than their Chinese counterparts in a trade war, at least in the view of Morgan Stanley’s Garner.

While almost 10 percent of companies in the MSCI U.S. index derive at least a tenth of their sales from China, less than 2 percent of firms in China can say the same about the U.S., according to Morgan Stanley.

So, do you want a trade war with China?

I can’t say that I do … but I am prepared if that happens, and you should be too.

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If you want to weigh in on today’s issue, or any of the issues we cover here in the Afternoon Edition, then I encourage you jump right in. Moreover, doing so is as easy as leaving me a comment on our website or sending me an e-mail.

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It’s a brand-new week, with a brand-new president. Stocks wobbled as traders digested Donald Trump’s first round of official actions. Q4 earnings reports helped to steal the spotlight, and the S&P 500 shed 6 points (-0.3%) in Monday’s session.

• Healthcare wars rage on: Aetna (AET) shares fell 2.7% after a D.C. judge said its plans to acquire Humana (HUM) would “substantially lessen competition” in several individual and Medicare insurance markets. HUM gained 2.2% as AET considers an appeal.

• Buying time: Yahoo! (YHOO) posted better-than-expected earnings today, at 25 cents per share on nearly $1.5 billion in revenue. That’s double last year’s 13 cents per share. (Revenue was almost $1.3 billion a year ago.) Ad sales were down, but layoffs and the company’s stake in Alibaba, which is up 40%, helped the bottom line. It also said the takeover deal with Verizon (VZ), expected to happen this quarter, will be delayed to Q2.

• Domestic crude oil shed 0.9% on rising U.S. energy-production prospects.

• The U.S. dollar hit a seven-week low today vs. other currencies. The Dollar Index has given back more than half of its post-election gains.

• Gold gains 15% on average in inauguration years. We think it could go much higher on the growing probability of trade wars and a weakening dollar, which Trump has said he favors because it could stimulate exports. Today’s uncertainty in the markets helped to push bullion 0.9% higher, to $1,215.60.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “Meet the China Trade War Winners and Losers”

  1. Considering some of what China has sent to us – poisoned pet food, lead paint on toys, fake gold coins – then maybe tariffs would be a good idea. If not tariffs, then perhaps an inspection fee (with a full inspection to be done and paid for by the fee), higher for countries known to export illegal or defective (dangerous) products.

  2. I would like to know your feelings on the possibility of the replacement of the dollar as the worlds reserve currency. My biggest fear is if Trump angers enough nations with his trade policies that he is opening up the possibility of another currency to replace the dollar. I believe that move may come to fruition sooner rather than later. China is already unloading US treasuries which leaves Japan and the Federal reserve as the largest holders of US debt. This nation can not support the debt we have in the government and the consumer. It seems to me that if this happens, the great recession will mimick a trip to the candy store in comparison.

  3. Having done business in China since 1989 I think we Have been in a trade war since 1994.

    Remember many of the 30 year charters are up so MacDonalds and Yum are forced to sell out. More to come.

  4. China’s major worry is inflation. Here’s an easy exercise. Make a graph of the daily price change of gold sold to buyers who paid with dollars. The ticker symbol is XAUUSD. Pick August 5th of 2015 as the origin date, and graph the price change going forward to today, but don’t graph it in dollars. Instead, graph it in Percent Change in price since August 5, 2014. Then overlay that graph, with a graph of the daily price change of gold sold to buyers, who paid with renminbi. An example graph is at https://www.tradingview.com/x/PxA1KXkY/
    for anyone who wants to see it. You’ll notice a funny thing.

    Americans who got paid in dollars, didn’t make very much money if they used the dollars to buy gold. The lucky American who timed the market just right and bought gold on the dollar-price low of August 5th, as of January 1st, 2017, made almost a 4% gain on that gold. Hanging on for the past three weeks would have helped the performance…who’d have guessed there’d be an epidemic of what the Marine Corps call SABU? Keeping the gold those tumultuous 3 weeks extra, raised the performance to 12.5% over the year-and-a-half. But now look at how the Chinese citizen, whose paycheck was drawn in Renminbi, fared: Buying on the same day, 8-5-15, and holding through 12-1-17, gave a cool 18% return on the investment.

    The graph doesn’t lie. Chinese people who convert their Renminbi into gold, are getting protected from currency inflation.

    The only possible explanation for that, is that the People’s Bank of China is inflating the renminbi at so high a rate, that the move to hold gold instead of currency, is diminishing the value of currency. Which is another way of saying that the price of the renminbi is too high.

    Devaluing the Yuan Renminbi, is of critical importance for China. It will add costs for many businesses, because a devalued yuan raises the price of imported raw materials for China’s many factories, reducing profits and possibly creating losses. It will also lower the price of China’s exports, However, China’s competitors in Japan and in Europe, will be distressed by the cheaper Chinese goods, that compete with their own manufactured goods.

    Donald Trump could be so useful for China’s monetary hawks, that if we hadn’t elected him ourselves, China might have had to invent him. They desperately need a good excuse for a yuan renminbi devaluation, one that they can blame on somebody who isn’t a citizen or resident of their country. Socialist Europe loves to mock Americans. Trump has proven himself eminently mock-able. (The news reports from the Women’s March give plenty of examples…although quite a number of Marchers proved mockable as well, most notably the woman whose sign expressed the wish that she, a human with rights to vote and litigate, wanted the same rights as a gun, an inanimate piece of property that can do neither, in fact can do nothing but spread it’s chamber open on the owner’s command, or give noisy birth to a flying slug of lead and a cloud of smoke, on the owner’s command…really not a well-thought-out picket sign for the concept of women’s rights.)

    At some point, China will devalue the yuan renminbi against the dollar. There will be a global correction of stocks and commodities, to adjust to the new reality. Europe will notice the pain and cry “Ouch!”. Europe’s socialists will shout for joy, that the stock-owning capitalist class have been made to cry out in pain. They will forget the euphoria when that pain in the dividend income, results in a cut in the income-tax outgo…even socialist magicians can’t tax income that nobody earned…and as the financial cupboard becomes emptier, more belt-tightening will be in order. European voters are unlikely to remember the Chinese devaluation as the cause of the belt-tightening they must endure and will keep voting for the socialist leaders who keep worsening their mess.

    Once the yuan renminbi is pegged at a realistic level against the dollar, China can deal with any new paperwork hassles and regulatory controls on their lawful exports.

    More ominous are the two new advertising campaigns that bloomed in US port and border cities over the past week. The FBI have put up signage, inviting people to “Report Border Corruption” and collect a reward…an image of $10,000 packets of C-notes changing hands, gives the idea some staying power. Not to be outdone, ICE has posters in public restrooms, describing what it calls warning signs that a group of people may be victims of human trafficking. The poster carefully explains that human trafficking covers a range of crimes. Child prostitution is a well-known crime on which traffickers get paid. Less well-known is the fact that trafficked people are often set to work in dangerous jobs that involve poisonous chemicals. Crooked Americans pay to have trafficked persons brought into the country to work these dangerous jobs, because they do not want to risk being sued for personal injuries to those workers, an enormous risk of hiring Americans to do those jobs. (Worth noting: American workers DO safely handle many poisonous, corrosive, and flammable substances in the workplace. They accomplish that by using proper safety equipment to protect them from inhaling or absorbing through their skin, the toxins and corrosive agents. The employer who is too cheap to pay enough money for training and equipment so that workers can be safe on the job, is a public menace, because until he is sued for harming workers, he competes unfairly with employers who get the same work done, safely.). So, hanging on restroom walls is the request that people contact the authorities, if they observe workers who look like they are being poisoned by toxic chemicals,

    Worth noting: In bygone years, ICE focused on deporting workers who were here illegally. Quietly, in the weeks since the election, ICE’s own rank-and-file workers, collaborating with the incoming Trump administration, appear to have shifted the entire focus of that enforcement effort.

    Rather than focus on deporting people for being here illegally, they now intend to focus on crooked Americans, who intentionally bring vulnerable people into the country and exploit them for money.

    While Mexican illegal immigration has had a great deal of attention during the 2016 election campaign, it’s not widely discussed that there are human traffickers operating in China. Getting to the bottom of these rackets may prove so rewarding for the US, Mexico, and Canada, that China will find good reasons to copy the Trump reforms and apply them.

    I do not expect a lengthy trade war. I anticipate a brief skirmish that, like the Toledo War of the 1830’s, ended for financial reasons. In that incident units of the Michigan Militia and Ohio Militia discovered a whiskey still, operating on a tract of land that was in dispute between Michigan and Ohio, and for that reason, did not sit within the jurisdiction of a US District Court, at which it’s owner could be sued by the Government to collect unpaid federal excise taxes levied on whiskey. The soldiers, who had been sent to occupy the land for their respective States. got a better idea. They fired off a couple of volleys of musket and rifle bullets, shooting an ox, four hogs, and numerous chickens, then held a peace parley, a barbecue, and drank several barrels of the seized whiskey, then returned home with news of their discoveries, and more whiskey. Whereupon Congress recognized that money was being lost, and enacted legislation, settling where the state boundary remains today.

  5. I believe the whole statement about trade wars is overstated. What I think is why should Mexico be allowed to import to our country, when the first thing that happens with US imported goods to Mexico is a 35% import tax. Why should the Chinese, or any other country or the EU, be allowed to freely purchase US companies and it is very difficult to impossible for US companies/corporations to purchase companies in China. The EU has protectionism in farm products and others. As far as I am concerned, the US is used as a cash cow in a largely one way direction. Correct me if I am wrong. I am for free trade, but not on the international one way terms that now exist. I am for free trade and fair trade.

  6. I certainly hope that any company that is manufacturing Communist China is well into their planning to move production. They have had almost two months to get ready. If they are not, then I feel sorry for their shareholders but not for the management. I doubt that Red China is going to change their policies and in fact will most like double down on them. If they aren’t planning, then I don’t want to hear them whine. Like it or not, there are big changes coming in working with the PRC and only those that adapt will do well.

    Additionally any company that is selling there is hopefully well along on creating overseas subsidiaries so they can continue to sell there when a likely trade or actual war breaks out.

  7. Our trade relationship with China has been overdue for a correction. China copies our goods without deference to trademarks, steals software, infringes on our patents, conducts industrial espionage at an unprecedented scale, attacks our computer systems and does not allow us to sell there unless we manufacture there (and sometimes not even then). No president to date has had the cahones to call them out on their predatory and illegal practices. I have read other sources indicating that THEY would suffer MUCH more if denied access to the U.S. market. It should be interesting.

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