Sino-US Trade Relations Turn Sour: Winners & Losers

President Trump’s administration has announced massive tariffs on Chinese imports, perhaps a move toward a full-fledged trade war with China.

As uneasiness about trade policy spikes, almost all sectors are expected to suffer. But, Apple Inc AAPL that relies heavily on production in China managed to escape the new U.S. tariffs. Players who generate bulk of their revenues domestically also remain fairly immune to a potential trade war.

Tariff Update on Chinese Imports

U.S. Trade Representative Robert Lighthizer recently imposed tariffs on about $200 billion of Chinese products in response to “unfair trade practices”.

The U.S. President said that “for months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies. We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices.”

As per administrative officials, tariffs on Chinese imports will be effective Sep 24 and will primarily be set at a rate of 10%. This will further rise to 25% by the end of the year. This time, the tariffs will raise prices of thousands of consumer products — starting from housewares and foods to luggage and electronics.

Anticipating response from China, Trump further added that “if China takes retaliatory action against our farmers or other industries, we will immediately pursue….tariffs on approximately $267 billion of additional imports.”

Beginning next week, Trump will have imposed tariffs on almost half of the Chinese goods imported to the United States. And if he follows through on his next threat, all Chinese imports will get affected. These U.S. tariff plans, nonetheless, have jeopardized the status of trade talks Treasury Secretary Steven Mnuchin has been trying to organize in the next two weeks with Chinese officials. China, in fact, vowed to retaliate to Trump’s tariff action.

China Stocks Tank the Most in About 4 Years

Even though several Chinese securities market officials said that U.S. tariffs won’t have much of an impact as China has enough fiscal and monetary tools to cope with the impact, its stock market took a hit.

The Shanghai gauge fell 1.1% to 2,651.79 on Sep 17, its lowest since 2014. This erased the last traces of recovery from a boom that turned into a $5-trillion bust. Chinese equities, in fact, haven’t recovered from the 2015-2016 crash. And the continuing trade tensions aren’t doing any good either. Some Chinese companies are now finding themselves cut off from equity financing, which in turn is compelling them to raise more debt.

 

Alibaba Group Holding Limited BABA co-founder Jack Ma did warn that the trade war between the two largest economies can last longer and have a bigger impact than most think. Ma said that “business communities in China and US will all be in trouble.”

Tariffs Condemned by American Businesses

Hun Quach, vice president of international trade for the Retail Industry Leaders Association, a trade group representing large chains like Walmart Inc. WMT and Best Buy Co., Inc. BBY, said that “we are extremely discouraged by the decision to move forward on tariffs on millions of products American consumers buy every day.” He added that “tariffs are a tax on American families and that consumer will bear the brunt of these tariffs.” This, in turn, may affect the profit margins of such large retailers of products and services.

Some technology stocks, including Amazon.com, Inc. AMZN, which is also classified as a consumer discretionary firms have been highly correlated to the trade issue. Investors, thus, are worried about the impact trade war could have on its supply chains and global prospects.

A recently formed coalition of business and farming groups called Tariffs Hurt the Heartland, in the meantime, vowed to oppose the new tariffs issued by the White house. The group said in a statement that “together, we will ensure that Washington understands the real-life consequences of tariffs for communities across the country.”

Nonetheless, as Trump announces new tariffs, the S&P 500 and the Dow snapped multiday win streaks on Sep 17, while the Nasdaq booked its worst day since Jul 27.

Commodities Aren’t Spared — Oil Prices Fall, Miners See Limited Growth

Global oil prices took a beating on Sep 18 after the Sino-US trade war clouded the demand outlook from two of the world’s top crude consumers. While Brent crude futures dropped 29 cents to $77.76 per barrel, the West Texas Intermediate crude was down 15 cents at $68.76 a barrel.

The tariffs are likely to hamper economic activity in both China and the United States, potentially affecting demand for oil as less fuel is consumed to move goods for trade. Wang Xiao, head of crude research at Guotai Junan Futures, added that “the growing trade dispute has hurt trading sentiment. The impact on economic growth is slowly dripping in, which again hurts oil prices.”

Biggest mining companies, further, added that rising US-China trade tensions will curb consumer purchasing power, trim growth and limit global economic expansion. BHP Billiton Limited BHP, a supplier of materials including iron ore, oil and copper, in particular, said that confrontation between the world’s top two economies would dent consumer confidence and eventually affect businesses.

Apple Breathes a Sign of Relief

Some are lucky though! The Cupertino, California-based tech giant Apple somehow managed to lobby with the Trump administration to keep its products off the new tariff list. These products mostly included Apple Watch, AirPods and components for its various devices.

The company did say in a letter to the Office of the United States Trade Representative this month that “tariffs increase the cost of our US operations, divert our resources, and disadvantage Apple compared to foreign competitors. As a result, tariffs will ultimately reduce the economic benefit we generate for the United States.”

Apple currently flaunts a Zacks Rank #2 (Buy). In the last 60 days, 10 earnings estimate moved up, while none moved down for the next year. The Zacks Consensus Estimate for earnings rose 2.6% in the same period. The company’s projected growth rate for the current year is 27%, while the Computer - Mini computers industry is projected to rally 25%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Why Thinking Small is Not the Only Thing to Do Now

In the wake of Trump’s tariff announcement, investors seem to be shifting to small-cap stocks. This is because such stocks tend to have higher proportion of domestic sales compared to large-caps. But, in reality, the difference isn’t much. Per data from FactSet Research, small-caps stocks in the Russell 2000 index derive 20.6% of their revenues from outside the United States, while stocks from the broader S&P 500 derive 30.3%.

Satellite player Harris, electrical equipment maker Hubbell, seller of lighting equipment Acuity Brands, aerospace and defense players KLX and L3 Technologies, Inc. LLL, conglomerate Roper Technologies, Inc. ROP, and factory control specialist Rockwell Automation derive a meagre 10% of revenues from China, per UBS.

Goldman stated that CSX Corporation CSX, a Zacks Rank #2 (Buy) company, derives 100% of its sales from the United States. Intuit Inc. INTU is another company that draws 95% of sales from the country, Goldman added. Hence, it’s quite natural that these companies stand to gain the most as trade war escalates. After all, their profits aren’t getting eroded due to limited exposure to foreign markets.

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