7 Stocks To Own For A US-China Trade Deal

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7 Stocks To Own For A US-China Trade Deal

Stock investors hoping to position themselves for a potential trade agreement between the United States and China should select tariff-sensitive equities. These stocks have significantly underperformed the overall market in recent months, and their low valuations may provide appealing purchasing opportunities. According to a recent HSBC report, seven companies, including Nvidia Corp. (NVDA), Skyworks Solutions Inc. (SWKS), Broadcom Inc. (AVGO), Micron Technology Inc. (MU), Marvell Technology Group Ltd. (MRVL), Intel Corp. (INTC), and Apple Inc. (AAPL), generate more than 20% of their total sales from China. Other investors believe tariff-sensitive industrial, oil, and agricultural equities will rise as well.

7 Stocks ThatMay Jump On a U.S.-ChinaTrade Deal

(% total sales from China market)

·Nvidia: 20%

·Skyworks; 83%

·Broadcom; 54%

·Micron; 51%

·Marvell; 50%

·Intel; 24%

·Apple; 20%

Source: HSBC; CNBC

Relief Rally

After ten years of relatively smooth sailing, the market was rocked by a wave of volatility in 2018, causing the S&P 500 to have its worst year in a decade due to a variety of factors such as concerns about slowing economic growth, geopolitical uncertainty, rising interest rates, and an escalating U.S.-China trade war. The trade battle represented a significant shift from 2017, when the two countries were on friendlier terms. Chinese President Xi Jinping paid a visit to President Donald Trump at Mar-a-Lago that year, while Trump visited China.

Many investors are now more confident about a trade agreement with China in 2019. Stocks rose last month after the agreement of a 90-day ceasefire between the world’s two biggest economies. “We think markets have significantly factored in risks of trade tensions rising,” said Ben Laidler, HSBC’s global equities strategist, according to CNBC.

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Tech, Energy, Agriculture: Trade Truce Plays

Laidler looked for equities of firms that get more than a fifth of their sales from China, have underperformed over the last three months, and have low forward price-to-earnings multiples.

Skyworks, which is selling at 9.8 times ahead profits, draws 83% of its revenue from China, followed by Broadcom, which is trading at a forward P/E of 10.7 and generates 54% of its sales from China, according to CNBC. With projected value multiples of 4.7 and 11.9, respectively, Micron Technology and Marvell Technology earn almost half of their sales from China.

Other equities that may benefit from a trade ceasefire include those in the battered energy and agriculture sectors. The Trump administration’s proposal to export tens of billions of dollars in shale and liquefied natural gas to China might benefit energy corporations. Meanwhile, agricultural product manufacturers may enjoy increased sales if a trade agreement includes China purchasing “huge volumes” of US farm goods, as President Trump has promised. InvestorPlace’s top selections include Monsanto Co. (MON), Deere & Co. (DE), and Cheniere Energy Corp. (CHK).

Looking Ahead

The objective for investors will be to enter these equities only when the contours of a transaction seem likely. It’s worth noting that investors have been waiting for a US-China trade agreement for most of the last year, disappointing investors who have seen little progress. It’s also a safe bet that if discussions break through and the trade war flares up again, these tariff-sensitive equities will suffer a significant drop. According to CNBC, if a 25% tariff is eventually applied on all Chinese imports, profits growth in 2019 would be 4.5% lower, more than half the growth rate.

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