Investor focus is shifting back to macro themes now that the Q2 2018 earnings season is drawing to a close. And right now, perhaps the biggest concern for investors continues to be the still escalating US-China trade war.
According to a Bloomberg report late last week, US President Donald Trump told aides he is ready to impose tariffs on $200 billion more in Chinese imports as soon as a public comment period on the plan ends next week. Washington is demanding Beijing improve market access and intellectual property protections for US companies, cut industrial subsidies and slash a $375 billion trade gap.
The world’s two largest economies have already applied tariffs to $50 billion of each other’s goods in a tit-for-tat trade war. Talks aimed at easing tensions ended last week without major breakthroughs.
The Dow Jones Industrial Average dropped after the Bloomberg headline. If President Trump actually follows through on this previously threatened move, we might see some weakness in blue chip stocks, including Apple (NASDAQ:AAPL) with 21% of its sales coming from Greater China; as well, a substantial amount of the final assembly of iPhones takes place in China. An estimated $15.7 billion of the US-China merchandise trade deficit last year came from iPhones, according to a Reuters analysis in January.
The ongoing trade war has so far failed to cause the remarkable rally in US technology stocks to sputter. Apple, which became the first company in history to cross the trillion dollar market cap benchmark, has surged 35% this year on the back of strong earnings growth and a bullish forecast for the remainder if 2018.
Chinese Stocks Biggest Trade War Victims So Far
Undoubtedly, the most significant casualty of the US-China trade war thus far has been Chinese stocks and indices. The Shanghai Composite, for example, is already among the worst performing global indices, as concerns over trade, slowing growth at home and monetary tightening sap consumer confidence in the world’s second-largest economy.
The coming week could bring additional weakness for some of the biggest Chinese tech stocks, including Tencent Holdings (OTC:TCEHY), the China-based internet services and advertising company, which dropped 8% since August 30 after Beijing intensified a crackdown on online gaming. citing rising levels of myopia, thereby increasing regulatory bottlenecks for companies in the world’s biggest gaming market.
Beyond trade wars, there is one earnings report scheduled for later this coming week which might be important for investors with an interest in chipmakers.
Broadcom (NASDAQ:AVGO), which is scheduled to report Q3 earnings on Thursday September 6 after the market close, has been under selling pressure since it announced in early July that it planned to buy New York-based software producer CA (NASDAQ:CA) for about $19 billion in cash. Investors didn’t like the deal, sending Broadcom shares lower by 13% since then.
For some analysts, the purchase of CA—which makes software for large, mainframe computers—doesn’t make sense and appears not to afford any synergies for Broadcom. During its upcoming earnings call, Broadcom management might try to convince investors one more time of the potential inherent in the CA deal and its future growth potential.
Trading at a forward price-to-earnings multiple of 10.62, Broadcom shares, which closed at $219.03 on Friday, look cheap after its recent pullback. The stock pays an annual dividend of $7 for a 3.23% yield.