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.”
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.
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.
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.
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.
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,
Uncommon Wisdom Daily