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Since Donald Trump’s election victory in 2016, the two biggest storylines in the investment world have been tech stock supremacy on Wall Street and the U.S. trade war with China.
The tech-tariff saga isn’t fading from the headlines anytime soon, creating opportunities and risks for investors who bet tech will retain its No. 1 performance ranking.
The bullish narrative is that the “Phase One” trade deal sealed between the United States and China late last year signals a thaw in their chilly relationship, eliminating some of the uncertainty in markets and giving a lift to the global growth outlook. The prospect of trade barriers falling, less theft of U.S. tech firms’ intellectual property and an opening of China’s market are all positive drivers for tech firms’ sales and growth.
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“If Chinese competitors can’t rip off or make the same products (as the U.S. firms), I think that would be a positive on profit margins longer-term,” said Matt Sabel, manager of MFS Technology Fund.
The trade disagreements won’t disappear overnight. The Phase Two and Phase Three deals, which will tackle more complicated issues, such as forced tech transfers and emerging technologies such as AI, quantum computing and the 5G network that affect each nation’s economic future and national security, have yet to be fully negotiated.
There’s also the strain on the supply chains of smartphone makers and chip companies caused by tariffs and the unknown path of policy.
“There are going to be ongoing … headwinds and friction between the U.S. and China,” said Mike Pyle, global chief investment strategist at BlackRock, the world’s largest money management firm.
Also clouding the outlook is a fear that the coronavirus could drag on Chinese growth, offsetting any gains from the first trade deal. Tech stocks aren’t the cheapest shares on the planet after a more than 60% rise since the end of 2018. And tech giants such as Google parent Alphabet (GOOGL), Facebook (FB) and Amazon (AMZN) aren’t immune to the risk of regulation by U.S. politicians looking to clamp down on their perceived monopolistic powers.
Still, in a world going increasingly digital, any improvement in the trade relationship between the United States and China could provide a boost to tech. The sector has been the best-performing portion of the Standard & Poor’s 500 stock index since Trump was elected in November 2016 and since the bull market began in March 2009, according to S&P Dow Jones Indices.
Here are some ways to play tech if the trade cease-fire continues or if both countries announce an official end to the trade war.
Buy digital payment stocks
As part of the Phase One deal, China, which has a population of roughly 1.4 billion, promised to give U.S. financial companies greater access to its consumers. That provides a huge business opportunity for electronic payment systems such as Visa (V), MasterCard (MA), Global Payments (GPN) and PayPal (PYPL), said Tom Plumb, manager of the Plumb Balanced Fund.
Buying these companies is a play on the growth of e-commerce, China’s accelerating shift toward electronic payments and the fact that roughly eight of 10 transactions around the globe are done by cash or check. Investing in these companies is a way to avoid the risk of owning companies that might be directly affected by tariffs.
“To have the ability to penetrate into the Chinese market is going to be something that is very positive for them,” Plumb said.
Try chip stocks
A reduction in trade tensions between the two economic superpowers will speed the global trend of “digitizing everything,” Plumb said. That’s bullish for chipmakers that are the driving force behind the digital age.
You don’t see them, but chips are embedded virtually everywhere. They’re the brains of autonomous cars. They power cloud computing. They’re in Plasma TVs. They’re the behind-the-scenes star of the fast-growing software-as-a-service (SaaS) business concept.
Many U.S. chip companies that manufacture chips or parts in China, or whose chips are part of products made in China and sold back to the USA, saw their share prices fall during the lengthy tariff standoff
The combination of pent-up demand caused by the nearly two-year tariff fight and the hoped-for rebound in growth resulting from a trade truce will create demand from semiconductors. Companies such as Microchip Technology (MCHP) and Qorvo (QRVO), two stocks Plumb owns, as well as Intel (INTC), Nvidia (NVDA), Advanced Micro Devices (AMD), Texas Instruments (TXN) and Qualcomm (QCOM) should benefit.
“We will see a continued strong recovery over the next few years in these chip companies,” Plumb said. “There’s a lot of capital spending that was delayed due to the tariffs.”
Buy the coronavirus dip, if there is one
A big wild card related to tech stocks and stocks overall is whether the coronavirus outbreak will temporarily disrupt supply chains, slow Chinese growth and ding U.S. tech company profits, causing a sharp sell-off. If that scenario occurs, MFS’s Sabel would be a buyer.
“The economic (and profit) numbers will probably be pretty tough this quarter and next,” Sabel said. “And perhaps that’s the opportunity if we were to see a sell-off due to (short-term) demand destruction from the virus.”
BlackRock’s Pyle expects any virus-related slowdown to be followed by a “V”-shaped recovery once the coronavirus risk fades.
Investors shouldn’t ignore the risks facing tech stocks, said Michael Cuggino, president and portfolio manager at the Permanent Portfolio Family of Funds.
Cuggino said his firm is not adding to its tech positions despite being “cautiously optimistic” about the outlook for gadget markets.
“We tell our investors, ‘Keep an eye on the risk factors,’ ” he said.
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