Cold War With China Will Hurt U.S. Stocks Long After Trade Deal

Even if the U.S. and China sign a trade accord, competition between the world's two biggest economies is likely to hurt U.S. stocks. That's because the technology industry, where America has been dominant, already is becoming a key battleground in a "Cold War" that's escalating between Washington and Beijing.

That conflict is likely to intensify, according to a major story in Barron's.

"The perception is that too much of the information- and communication-technology supply chain is centered on China,” Paul Triolo, practice head of geo-technology at political risk consulting firm Eurasia Group, told Barron's. He added, “If we are in a conflict and using infrastructure built by China, they could theoretically hit a button and shut off everything. After 30 years of saying companies should optimize supply chains and move some abroad, now we are saying it’s a security concern.”

A sampling of U.S.-based companies that are particularly vulnerable in this conflict is listed below.

8 Stocks Caught In New 'Cold War'

  • Flex Ltd. (FLEX)
  • Broadcom Inc. (AVGO)
  • Qualcomm Inc. (QCOM)
  • Micron Technology Inc. (MU)
  • Intel Corp. (INTC)
  • Qorvo Inc. (QRVO)
  • Advanced Micro Devices Inc. (AMD)
  • Applied Materials Inc. (AMAT)

Source: Barron's

Significance For Investors

Flex offers supply-chain logistics services, while Qorvo develops advanced communication technologies used in mobile communications, aerospace, and defense applications. Applied Materials is a leading manufacturer of the factory equipment on which semiconductors are produced. The other companies above are leading chip makers.

Five of these companies -- Flex, Broadcom, Qualcomm, Micron, Intel, and Qorvo -- are at risk because of U.S.-led efforts to limit the global sale of tech and telecom equipment sold by China's Huawei Technologies Co. Ltd. Each of the five companies had at least $90 million in sales to Huawei in 2017, the latest year for which data is available per Barron's, Those sales now may be collateral damage of the new cold war. Huawei has grown into a major competitor of U.S-based Cisco Systems Inc. (CSCO) in the market for computer and communications networking equipment and services.

Collateral Damage

Huawei has been targeted by the Trump administration for multiple reasons: its close ties to the Chinese military and spying apparatus, for violating international sanctions against Iran, and for allegations that it is involved in the theft of intellectual property. The U.S. is urging its allies to ban Huawei products from use in both civilian and military communications applications. U.S. companies are likely to be prohibited from selling to Huawei, similar to the ban placed on Chinese telecom equipment maker ZTE Corp. (ZTCOF) for a time in 2018. When that ban was announced, the shares of key suppliers to ZTE took big hits, per Barron's.

Chip Stocks At Risk

Meanwhile, China is determined to expand its own semiconductor industry to reduce imports and eventually to become a major international supplier. China currently imports about 70% of the chips that it uses. This has large implications for six of the eight stocks in the table, which rely on the Chinese market for significant proportions of their total revenue, per analysis by Wolfe Research and Bloomberg cited by Barron's: Qualcomm, 67%; Micron, 57%; Broadcom, 49%; AMD, 39%; Applied Materials, 30%; and Intel, 27%.

Looking Ahead

These trends mean that China is rapidly morphing from a land of opportunity for U.S. stock investors and corporations into a potential minefield. Huawei has grown into a giant international tech player, with estimated fiscal 2018 revenues of $108 billion, and sales in 170 countries, per Barron's. Dan Wang, an analyst with Gavekal Research, believes that widespread bans may badly damage the company. If this happens, retaliatory measures by the Chinese government and a nationalistic backlash against U.S. companies by Chinese businesses and consumers may follow.