August started off on an edgy note. President Donald Trump out of the blue threatened a fresh tariff of 10% on the remaining $300 billion of Chinese goods effective Sep 1. Trump also said that the new round of tariffs might be raised beyond 25%. With this, the United States will effectively tax all Chinese imports(read: ETF Predictions for a Historically Low August).
China retaliated by allowing the yuan to slip to the lowest level against the dollar in more than a decade. This ignited concerns that China was undervaluing its currency to make its exports more competitive in global markets (read: ETF Areas Under Focus on China's Yuan Devaluation).
Against this backdrop, we highlight a few sectors and their related stocks and ETFs that could be hit hard by the escalating trade tensions.
As tariff tensions are heating up, consumer stocks are under massive pressure. An analysis by J.P. Morgan’s chief equity strategist Dubravko Lakos-Bujas indicated “that two-third of the products to be hit by the impending round of tariffs are concentrated in the technology and consumer discretionary sectors of benchmark stock indexes,” as quoted on MarketWatch. According to a report by UBS, hardline and grocery retail are one of the hardest hits this time.
Retailers will try to pass on some burden of higher costs to consumers, thereby raising prices. This is likely to bump up inflation levels in the U.S. economy. Higher inflation in turn will give a boost to bond yields. This, in turn, might push up consumers’ borrowing costs and hurt ETFs like iShares U.S. Consumer Services ETF (IYC - Free Report) and SPDR S&P Retail ETF (XRT - Free Report) (read: Consumer Staples ETFs Beating Discretionary ETFs: Why?)
In any case, U.S. consumer services have about 10% sales exposure to China. Investors should also note that retailers and grocery stores may even resort to job cuts, which may worsen the employment situation in the economy.
Crude prices might get hurt by the escalation in U.S.-China trade tensions. Chinese tariffs of 25% on liquefied natural gas (LNG) imports from the United States are already in place. Now with tensions spiking, market watchers expect to China to begin shunning U.S. crude oil imports. This could be a huge threat to U.S. crude prices as the United States topped Saudi Arabia and Russia to take the crown of the largest crude producer last year, while China became the world’s largest oil buyer in 2017, per Bloomberg.
U.S. crude ETF United States Oil Fund LP (USO - Free Report) lost 7.5% in the past five days (as of Aug 6, 2019). Energy companies have about 14% exposure to China. So, Chinese energy tariff dealt another blow to the sector. Energy ETFs that could face the brunt are Energy Select Sector SPDR ETF (XLE - Free Report) and VanEck Vectors Unconventional Oil & Gas ETF (FRAK - Free Report) (read: 5 Overlooked Energy ETFs Yielding More Than XLE).
Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks on rising trade tensions (read: After Upbeat July, Will Semiconductor ETFs Slump in August?).
Chipmaker Qualcomm (QCOM - Free Report) has 65% revenue exposure to China and Nvidia’s NVDA sales exposure to China is 56%, per Goldman Sachs. Apart from these, some other tech and semiconductor companies, which have sales exposure to China in the range of 22% to 55%, include the likes of Intel INTC, Micron Technology MU and Applied Materials AMAT. This clearly explains why the mood is somber in the semiconductor space. So, VanEck Vectors Semiconductor ETF (SMH - Free Report) may face troubles.
China has reportedly halted imports of U.S. agricultural products, building pressure on agriculture equipment makers Deere & Co. DE and AGCO Corp. (AGCO - Free Report) . AGCO has about 10% exposure to IQ Global Agribusiness Small Cap ETF CROP while Deere has considerable focus on iShares MSCI Global Agriculture Producers ETF (VEGI - Free Report) , First Trust Indxx Global Agriculture ETF FTAG and VanEck Vectors Agribusiness ETF (MOO - Free Report) .
DE and AGCO have lost about 10.2% and 10.9% in the past five days (as of Aug 6, 2019) while CROP, FTAG, MOO and VEGI shed about 5.8%, 4.8%, 3.9% and 5% during the same timeframe (read: John Deere's Weak Q2 Results Drag Down Agribusiness ETFs).
Tech Hardware & Equipment
Tech companies that have extensive trade relations with China would be at a high risk of falling prey to the trade war. SPDR S&P Technology Hardware ETF should thus be followed closely.
U.S. auto companies earn about 12% revenues from China. According to Global Wealth Management Chief Investment Officer of UBS, the ongoing clash increased chances that "tariffs could also be placed on auto imports." This, if put into effect, will weigh on First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report) (read: June Retail Sales Beat Forecast: ETF & Stock Winners).
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