Trade Alert: China Trade War opens opportunities

With the banning of Huawei, The Great Trade War of the 21st Century has gone from being mostly a distraction for the markets to perhaps something more ominous. Or maybe not.

Trump’s tariffs haven’t really mattered much to the markets or the economy, as I’ve predicted from the beginning when Trump first imposed tariff. But the administrations handling of the Huawei situation has been a bigger issue. The arrest of Huawei’s CFO (and the founder’s daughter) in Canada at the US’ request was a bit alarming. And even bigger is this ban doing business with Huawei that Trump instituted last week and then pulled back on today. The optics of Trump giving a reprieve on the Huawei ban just days after announcing are not good. If the reprieve really is about letting companies who supply and use Huawei equipment get a chance to make alternate plans, does that mean that the administration was really genuinely caught off guard by the impact of the ban? Or is the flip flip a reaction to the Xi’s visit to China’s rare earth mines which was a hint that China could cut off all rare earth materials that chip companies require if they wanted to?

Regardless of the reasons behind the ban, then sudden reprieve, there’s no doubt that the Trump administration is forcing China to change its ways here. Before today’s sudden flip flop, yesterday, I would have written that maybe Trump’s actually trying to force China to change its  ways in more substantial ways than I have been expecting.

Before today’s 90 day reprieve on the Huawei ban, Trump is basically throwing down the gauntlet here, telling China that it essentially has two choices: Come back to the negotiating table and get a deal done or lose access to all US technology.

China, of course, still has a choice — they could choose to go back to the negotiating table or…

China could really go extreme here and escalate this from a trade war to something close to a World War III. What if China were to just de facto, in all but name, nationalize every factory and other US asset in China? What if China were to move to take control of Taiwan, mostly in order to take over Taiwan Semiconductor, which is the company that makes chips for Apple, Qualcomm, AMD and most other semiconductor companies not named Intel?

Would Western Europe and Australia and other developed economies ban China? Would India bail on China (see chart below before you answer)?

Guess what the flipside of all this worrisome analysis is. These concerns are probably mostly overblown and they’re probably already more than priced in to many stocks. Qualcomm and Apple are both being relentlessly sold off on these China trade concerns and that probably makes them good buying opportunities. I bought a little of both this week.

And two new names for you, one based in China and also the aforementioned Taiwanese company, both of which have been absolutely crushed in the last two weeks as the trade wars heated up.

Today, I started building positions in BIDU and TSM.

BIDU is by far the most dominant search engine in China. They’re also in a lot of other businesses, much like Google’s Alphabet is. They’ve got self-driving car technology. They’ve got billions of dollars of investments in tech companies in China and other countries. The company missed earnings and guided lower when it reported earnings last week. And the stock has been crushed to 5-year lows. The chart looks terrible. But the stock is trading at maybe 10-12x next year’s earnings (if next year’s earnings estimates are anywhere near accurate, which they might not be if The Great Trade War continues to escalate or if the company loses marketshare or etc). Topline growth at Baidu should be close to 15% for the next few years. I don’t know that I consider Baidu a forever kind of holding, but it looks like a good opportunity to buy here and give ourselves some room to buy more if it gets hit more near-term. Time horizon if probably 3-5 years for this one.

Meanwhile, TSM, is by far the most dominant and advanced semiconductor foundry. Trading at 15x next year’s earnings, the stock will pay us a 4.3% dividend if we hold it the whole year. But more importantly, there’s a big trend of companies designing their own custom chips and outsourcing their making to TSM — as evidenced by Google’s and Amazon’s new data center chips and Tesla’s new in-house-developed Full Self Driving chip. If TSM were based in the US, it would probably be one of my top 3 favorite stocks here to own for the next 30 years. Because it’s based in Taiwan, I can’t say it’s a top 3 favorite, but I do think at these valuations it’s good risk/reward scenario for the long-term anyway.

I also sold all my KEYS to make room for new names.