I've heard the question a dozen times in the past two months.
It's come from readers, friends, family, and colleagues. I'm the "China guy," after all – I've been bullish on Chinese stocks since 2014. I'm supposed to have the answer. So it keeps coming up...
"Steve, what the heck does a trade war really mean for investments in China?"
It's an important question. The thought of a trade war is scary for anyone who's put money into Chinese stocks.
Don't let it scare you, though. I believe the trade-war rhetoric is actually a buying opportunity. And more than that, the real loser in a U.S.-China trade war isn't who you'd expect.
Let me explain...
First, you should know that I don't expect a true trade war between the U.S. and China. It would be bad for both sides... And that's why I believe the bluster so far is only creating a buying opportunity.
That said, if we do get a full-blown trade war, the real loser might surprise you. Most folks assume the loser will be China. However...
The U.S. will be the real loser in a full-blown U.S.-China trade war.
Large U.S. companies have a lot more to lose than the Chinese stocks. And it's easy to prove.
To know who wins and loses in a trade war, you need to know which companies make money outside their home country. Specifically, you need to know which American companies make money in China... and which Chinese companies make money in America.
That's all that matters.
The folks at MSCI – the world's leading provider of international stock indexes – recently dug into this idea. They looked at the MSCI China Index and MSCI USA Index a little more than a month ago to see who really loses in a U.S.-China trade war.
The surprising result is that Chinese companies don't earn much revenue from the U.S. The table below shows the sectors that earn more than 2% of their revenue there. Take a look...
Only three sectors in China earn 2% or more of their revenue from the U.S. So in a trade war, most of the MSCI China Index would make it through unharmed.
That's less true for the U.S. The table below shows which U.S. sectors have 2%-plus revenue exposure to China...
Nearly every U.S. sector earns 2% or more of its revenue from China. Only utilities and telecom stocks missed the list.
If Chinese revenue dried up due to a trade war, most large American businesses would feel it. Technology stocks in particular could take a beating.
Simply put, U.S. companies need China more than Chinese companies need the U.S.
That means U.S. stocks are more vulnerable to a trade war than Chinese stocks.
This isn't the mainstream view, of course. I know folks who've followed my advice on China are worried about this. But the numbers are clear.
You can stop worrying about a trade war killing your China investments.
I believe the overblown rhetoric has set up a buying opportunity. And if a trade war does set in, Chinese stocks are less vulnerable than you probably think.
Good investing,
Steve
Further Reading
"The American perception of China versus the reality on the ground is as big a gap as I have ever seen in my investing life," Steve says. "As that gap closes, someone is going to make a lot of money." Read more here.
"The first 'tidal wave' of money into Chinese A-shares is about to begin," Justin Brill writes. In this essay, he walks through some of the latest developments surrounding Steve's bullish China thesis. Check it out right here.
The trade-war scare likely won't last long, thanks to MSCI's historic change...
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Mastercard (MA)... credit cards
Visa (V)... credit cards
E-Trade Financial (ETFC)... online brokerage
Etsy (ETSY)... online marketplace
Shutterfly (SFLY)... digital photos and prints
Citrix Systems (CTXS)... cloud computing
Box (BOX)... cloud storage
Ferrari (RACE)... fast cars
World Wrestling Entertainment (WWE)... pro wrestling
DSW (DSW)... shoes
BP (BP)... oil and gas
Valero Energy (VLO)... oil and gas
HollyFrontier (HFC)... oil and gas
Phillips 66 (PSX)... oil and gas
Cameco (CCJ)... uranium
Rayonier (RYN)... timberland
NEW LOWS OF NOTE LAST WEEK
Kellogg (K)... Fruit Loops, Pop-Tarts, Eggo
Kraft Heinz (KHC)... Oscar Mayer, Jell-O, Velveeta
General Mills (GIS)... Cheerios, Betty Crocker, Pillsbury
Procter & Gamble (PG)... Crest, Pampers, Tide
PepsiCo (PEP)... soda
CBS (CBS)... media
Comcast (CMCSA)... "cord cutting" victim
Dish Network (DISH)... "cord cutting" victim
AT&T (T)... telecom
