U.S.-China Tensions Flare Up: Sector ETFs At Risk
It seems that U.S.-China tensions are alive and kicking even in the Biden administration after a tensed four-year period in the Trump administration. Any improvement in major economic U.S.-China relations including disagreements over tech and trade seems unlikely in the near term as the U.S. Commerce Department lately included seven Chinese supercomputing entities to a U.S. economic blacklist, citing national security concerns.
The seven entities were blacklisted for “building supercomputers used by China’s military actors, its destabilizing military modernization efforts, and/or weapons of mass destruction programs,” as quoted on CNBC. “Supercomputing capabilities are vital for the development of many – perhaps almost all – modern weapons and national security systems, such as nuclear weapons and hypersonic weapons,” U.S. Secretary of Commerce Gina Raimondo wrote in a statement, the CNBC article mentioned.
Investors should note that China has been slapped with tariffs in the Trump era. The Trump administration has in fact forced China to buy more American goods. Alex Capri, a research fellow at Hinrich Foundation and a visiting senior fellow at National University of Singapore Capri recently told CNN Business that Biden's “Build Back Better” is probably a clearer version of the Make America Great Again platform of Trump, as far as “reshoring and ring-fencing strategic industries” is concerned.
Biden’s plan indicates the likely efforts to eliminate China from pharmaceutical, semiconductor, battery, rare earth and artificial intelligence supply chains as "just the beginning."Experts like Capri believe that the United States will continue to resort to measures to separate parts of the American economy from China. Biden’s recent initiatives to review U.S. supply chains indicate that he wants to ensure that critical products and supplies are not obliged to Beijing.
On the basis of the above-mentioned theory, we dig a little deeper into the sectors that should be under watch amid continuing trade tensions.
Semiconductor
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. Chipmaker Qualcomm (QCOM) 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). So, VanEck Vectors Semiconductor ETF SMH may face troubles.
Tech Hardware & Equipment
Tech companies that have extensive trade relations with China would be at high risk if the trade war flares up. In fact, Goldman Sachs has compiled a list of companies with considerable revenue exposure to China. These companies’ revenues are 14% exposed to China, per a CNBC article. SPDR S&P Technology Hardware ETF XTH should thus be followed carefully.
Casino
U.S. casino companies like Wynn Resorts (WYNN), Las Vegas Sands (LVS) and MGM Resorts International (MGM) have considerable operational exposure to China. Along with these stocks, casino gaming ETF VanEck Vectors Gaming ETF BJK should thus be followed.
Aerospace
China is a key market for Boeing Co. (BA) where it serves as the largest exporter to America. Thanks to trade tensions, China may take harsh actions against such American companies. In any case, Boeing is in a tight spot thanks to its own operational problems and the coronavirus crisis. So, aerospace ETFs like iShares U.S. Aerospace & Defense ETF ITA could be under pressure.
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