The overcast skies of trade conflict over the United States and China are finally showing signs of clearing up. The tensions, which commenced in March following President Trump’s imposition of tariffs worth $50 billion on Chinese imports, has been the primary reason behind severe volatility in U.S. markets for the last four months. In fact, the lingering tensions kept the markets on tenterhooks on apprehensions of a full-fledged global trade war.
National Security Concerns Dominate Telecom Space
The Trump administration had barred U.S. companies from selling products to Chinese counterparts due to apprehensions of Chinese spying on Americans utilizing these high-tech products. This move is evidence of the fiercely aggressive stance that the U.S. government is taking to protect innovative next-generation products of the U.S. tech giants.
U.S. government is deeply concerned about China’s drive to unseat the United States as the primary developer and supplier of state-of-the-art products in the fields of high-tech artificial intelligence, semiconductors, quantum computing and various other digital technology driven sectors. Notably, the Chinese government patronizes most of these big manufacturers. These companies have become serious threat to the U.S. economic and military supremacy.
Signs of Relief
On May 25, the Trump administration stated that it has reached a deal to bring back ZTE Corp. in business in the United States. ZTE needs to pay $1.3 billion in fine and make some changes in its management to get back into businesses with U.S. companies.
Last month, the U.S. Commerce Department issued an order prohibiting all U.S. tech equipment manufacturers from selling products to the Chinese telecom behemoth citing that ZTE violated the terms of a 2017 settlement. Notably, the settlement resolved ZTE’s evasion of U.S. sanctions for selling to Iran and North Korea.
On May 26, The Wall Street Journal reported that China is set to approve Qualcomm Inc.’s (QCOM - Free Report) planned $44 billion acquisition of Netherlands-based NXP Semiconductors NV (NXPI - Free Report) in the next few days.
Reuters also reported that Qualcomm is expecting to meet this week in Beijing with China's antitrust regulators in a final push to secure clearance for the deal. Notably, the proposed deal has got a nod from eight of the nine required global regulators, with Chinese clearance the only one pending.
Who Will Gain?
If the U.S. government finally withdraws sanctions imposed on ZTE and China approves NXP Semiconductors deal then the main beneficiary will be mobile chipset developer Qualcomm. The company generates nearly 28% of its revenues from China especially from ZTE and Huawei. Meanwhile, NXP Semiconductors is the largest manufacturer of high-performance, mixed-signal mobile chipsets with 14% market share. The combined entity is expected to generate annual revenues of more than $30 billion.
Additionally, world’s largest chipset developer Intel Corp. (INTC - Free Report) will also benefit. Moreover, fiber optic component developers will also gain from removal of selling restrictions on ZTE. Major optical fiber component developers such as Acacia Communications Inc. (ACIA - Free Report) , Oclaro Inc. (OCLR - Free Report) , Finisar Corp. (FNSR - Free Report) and Lumentum Holdings Inc. (LITE - Free Report) are likely to gain if U.S. sanctions on ZTE are revoked.
Acacia Communications and NXP Semiconductors carry a Zacks Rank #5 (Strong Sell). All other stocks mentioned above, carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Chart below shows performance of seven stocks in the last three months.
The United States and China are trying to defuse the trade war tensions by coming to a compromise with the tariffs. This week, high-level U.S. and Chinese delegations will sit for a meeting to ease trade tensions between the two countries. This will be the third such meeting within a month. Fading of trade conflict between two countries will also open business opportunities for several U.S. tech titans.
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