5 Tech Stock Winners From China Trade Truce

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5 Tech Stock Winners From China Trade Truce

Given the two countries’ extensive economic links, the potential of a full-fledged trade war has rocked the US stock market for months. Tensions between the two governments may be reducing, causing the stock market to breathe a collective sigh of relief. Stocks that stand to benefit the most outperform the S&P 500 Index (SPX) in terms of the proportion of sales coming from China. As the chart below shows, the extent of their exposure is astonishing. SkyworksSolutions Inc. (SWKS), Qualcomm Inc. (QCOM), Qorvo Inc. (QRVO), Broadcom Inc. (AVGO), and Micron TechnologyInc. are among them (MU).The announcement of a trade truce boosted most tech stocks.

Company% Total Sales in China
Skyworks83%
Qualcomm64%
Qorvo62%
Broadcom54%
Micron51%

Source: FactSetResearch, as reported byCNBC.

Qorvo creates radio frequency (RF) technology for use in mobile communications, military, and aerospace. The remaining four firms are semiconductor producers. FactSet’s entire list of 20 firms includes 16 in the technology sector. Non-tech companies include casino and hotel operator MGM Resorts International (MGM), which has a 20% stake; medical diagnostics company Agilent Technologies, Inc. (A), which has a 20% stake; auto parts supplier AptivPLC (APTV), which has a 26% stake; and water heater manufacturer A.O. Smith Corp. (AOS), which has a 33% stake.

Interlinked Economies

According to the US Census Bureau, the total value of US goods exports to China in 2017 was $130 billion, while imports from China was $506 billion. According to another Census figure, US service exports to China were $56 billion, while imports totaled $18 billion.

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China is not just a significant supplier of completed products to the US market, but many US firms rely on extended worldwide supply chains for crucial components coming from China. Many of the technology businesses on the FactSet list rely not just on sales into China, but also on sourcing and final assembly on the Chinese mainland. Apple Inc. (AAPL), the creator of the iPhone and computers, is remarkable in this sense. Apple also generates 20% of its revenue in China.

The Nobel winner economist Robert Shiller has cautioned that the mere prospect of trade disruptions may be extremely unsettling for the global economic system. These supply chains are the product of years of planning and development, and establishing alternative sources and methods cannot be done quickly. (See also: Why a Trade War Threatens Economic ‘Chaos:’ Shiller.)

Unanticipated Consequences

On national security concerns, the Trump administration rejected a planned combination of chipmakers Qualcomm and Broadcom earlier this year. Broadcom was founded in Singapore at the time, but moved its headquarters to the United States in reaction. Longer-term consequences of this incident, as well as speculations that the Trump administration was preparing to limit chip supplies to China, may be that China attempts to jump-start its own efforts to become a significant manufacturer of semiconductors in order to minimize its dependency on US suppliers. (For more, read How a Trade War Could Kill Chip Stocks.)

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