Head of Equity Strategy
Summary: As the trade war evolves into a technology cold war many industries stand to lose but semiconductor companies are more exposed than anything else. Add in the rising risk of recession and you’ve got what looks like a perfect storm, says Saxo's Peter Garnry.
Semiconductors are bleeding and it will continue
Since the US escalated the trade war by increasing the tariffs from 10% to 25% on $200 billion of Chinese goods on May 6 semiconductors have been tanking. The industry group can be divided into two groups: semiconductor equipment makers and pure semiconductor manufacturers.
We have devised two custom indices tracking those two industries to measure the impact on the global supply chain the trade war. As the chart below shows the semiconductor industry is hurting from the US-China trade war escalation and our view is that it will continue. Investors should stay underweight semiconductors. In our last trade war analysis we highlighted the US companies with the biggest exposure to China and the majority of those are in fact US semiconductor companies.
If we look at how semiconductor manufacturers are performing based on their geography we see a clear sign that US companies stand to lose the most, together with South Korea. If the global supply chain in the semiconductor industry is being reconfigured US semiconductor companies will lose short-term revenue in China and will have to invest in new manufacturing facilities in other countries.
Chinese semiconductor companies will on the other hand be more directly supported by the Chinese government and thus win out relatively speaking. But what about WTO rules about state support? In our view the WTO framework is at risk of being obsolete as the US is clearly steering away from multilateral trade deals towards bilateral deals. In this world order China would not be accountable for state sponsorship of semiconductors inside WTO.
US equities have broadly outperformed
Outside the casualties in semiconductors the US equity market has in fact outperformed the five countries running the biggest trade surplus against the US. Our trade war ETF basket shows that US equities have outperformed by 22%-points since early 2018 when the trade war broke out. In the markets view trade surplus countries are more vulnerable. Only time will tell whether this is in fact true or not.