TAR­IFFS THREATEN U.S. HIGH-FLY­ING STOCKS

Tech­nol­ogy and con­sumer dis­cre­tionary coun­ters may be hit if Trump im­pose more levies on China im­ports

New Straits Times - - BUSINESS -

UNITED States tech­nol­ogy and con­sumer dis­cre­tionary stocks have been in­su­lated from global trade ten­sions, but if an­other round of US tar­iffs on Chi­nese goods goes into ef­fect, even those high-fly­ing sec­tors could come down to earth.

The US and China have al­ready im­posed tar­iffs on US$50 bil­lion (RM206.93 bil­lion) worth of each other’s goods. The White House has pro­posed tar­iffs on an ad­di­tional US$200 bil­lion worth of Chi­nese im­ports, in­clud­ing fur­ni­ture, hand­bags and some com­puter parts.

US Pres­i­dent Don­ald Trump has said he is pre­pared to move for­ward with levies on an ad­di­tional US$267 bil­lion — in essence, all Chi­nese im­ports into the US.

The in­clu­sion of con­sumer goods is a shift from pre­vi­ous rounds of US tar­iffs, which have pri­mar­ily hit the in­dus­trial sec­tor. Shares of com­pa­nies such as Boe­ing Co and Cater­pil­lar Inc have risen and fallen in tan­dem with trade sen­ti­ment.

On Wed­nes­day, the Trump ad­min­is­tra­tion said it in­vited Chi­nese of­fi­cials to restart trade talks, which has been wel­comed by Bei­jing. US stocks have perked up on the news, but that op­ti­mism could be fleet­ing.

“In­vestors in gen­eral are too pre­dis­posed to re­act too pos­i­tively to any signs of im­prove­ment in the sit­u­a­tion,” said Kristina Hooper, chief global mar­ket strate­gist at In­vesco here. “I don’t ex­pect the (Trump) ad­min­is­tra­tion to back down.”

Com­pa­nies in the tech and con­sumer dis­cre­tionary sec­tors have be­gun sound­ing alarm bells. A broad ar­ray of US in­dus­try groups, rep­re­sent­ing com­pa­nies such as Mi­crosoft Corp, Ama­zon.com Inc, Wal­mart Inc and Mat­tel Inc, has voiced op­po­si­tion to the new tar­iffs.

Even Ap­ple Inc, whose stock has con­trib­uted heav­ily to the S&P 500’s gains, has warned that the pro­posed tar­iffs would af­fect sev­eral of its prod­ucts, in­clud­ing the Ap­ple Watch and AirPods head­phones, though it did not men­tion the iPhone.

In part be­cause of trade is­sues, shares of tech com­pa­nies have got­ten off to a rocky start this month. As of Thurs­day’s close, the S&P 500 tech sec­tor had fallen 1.2 per cent this month, ver­sus a 0.1 per cent rise for the S&P 500 as a whole. S&P 500 con­sumer dis­cre­tionary stocks had risen 0.2 per­cent, less than the two per cent ad­vance in in­dus­trial stocks.

“The next round of es­ca­la­tion re­ally does im­pact the lead­er­ship of the mar­ket,” said Lisa Shalett, head of in­vest­ment and port­fo­lio strate­gies at Mor­gan Stan­ley Wealth Man­age­ment.

In an­tic­i­pa­tion of height­ened trade ten­sions, com­pa­nies have built up in­ven­tory, which could have an ad­verse ef­fect on sup­ply chains later on, Shalett said. In­ven­tory pile-ups have al­ready pushed down pric­ing in the semi­con­duc­tor in­dus­try. The Philadel­phia SE Semi­con­duc­tor In­dex had fallen 2.8 per cent in Septem­ber as of Thurs­day’s close.

Con­sumer-ori­ented com­pa­nies face a catch-22 in their re­sponse to tar­iffs. Those that com­pete on price, such as Wal­mart, will likely have to ab­sorb the cost of levies, which will cut into their mar­gins. But com­pa­nies that pass costs onto con­sumers, as Ap­ple has in­di­cated it will do, risk damp­en­ing de­mand for their prod­ucts.

In­vesco’s Hooper pointed to wash­ing ma­chines as an ex­am­ple. Tar­iffs on steel and alu­minium caused Whirlpool Corp to raise prices on its ap­pli­ances, and its sec­ond-quar­ter earn­ings slumped as a re­sult.

To be sure, con­sumer elec­tron­ics are flashier prod­ucts than a washer-dryer set. And US tech com­pa­nies can skirt some tar­iffs by ship­ping Chi­nese-made parts di­rectly to other coun­tries for assem­bly and then im­port­ing the fin­ished items into the US, said Scott Yuschak, eq­uity strat­egy an­a­lyst at SunTrust Ad­vi­sory Ser­vices in At­lanta. The list of tar­geted items in the next round of tar­iffs ex­cludes cell phones, for in­stance.

With such mit­i­gat­ing fac­tors, many in­vestors are re­luc­tant to make sweep­ing changes to their port­fo­lios, though Mor­gan Stan­ley’s Shalett has rec­om­mended a ro­ta­tion into de­fen­sive sec­tors.

Many are likely wait­ing for third-quar­ter earn­ings for more de­tails on the im­pact of trade, said David Joy, chief mar­ket strate­gist at Ameriprise Fi­nan­cial in Bos­ton.

But fur­ther signs of es­ca­la­tion in the US-China trade war could quickly raise the stakes for the S&P’s lead­ing sec­tors.

REUTERS PIC

As of Thurs­day’s close, the S&P 500 tech­nol­ogy sec­tor had fallen 1.2 per cent this month, ver­sus a 0.1 per cent rise for the S&P 500 as a whole.

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