Last week President Trump added Huawei, the world’s largest telecommunications equipment maker, to a trade blacklist. Already, Google has suspended some business with Huawei and some US chip makers have said they will not supply Huawei for the time being, according to Bloomberg.
“US companies are now required to obtain licenses to transfer technology to Huawei,” wrote Sundeep Gantori, equity analyst in the chief investment office at UBS Global Wealth Management in Singapore, in a research note.
“This effectively makes it impossible to sell new components or chips to the company, the effects of which could be significant for the businesses involved as well as for investors.”
The latest assault on Huawei sent tech stocks reeling at the start of this week, as investors worried about the broader effect on global chipmakers and an escalation of the Sino-US trade war.
“With the news around the US and Huawei taking a turn for the worse, it seems that the trade war is increasingly showing signs of becoming a tech war,” wrote Seema Shah, senior global investment strategist at Principal Global Investors, in a client note.
“The further this trend develops, the bigger the collateral damage will be – particularly in Asia and the US, but the ripple effect will be significant across the globe.”
The S&P 500 technology sector slumped 1.27% on Monday, according to Bloomberg data, led by Apple shares, which dropped 3.3% and US suppliers of Huawei, which earn significant amounts of their revenue form China, including Qualcomm, Micron Technology and Broadcom, which fell about 5%.
Taiwan Semiconductor, which is widely held in mutual funds, plunged more than 3%.
Meanwhile, China’s BAT tech giants (Baidu, Alibaba and Tencent) are still trying to recover from a difficult 2018, which saw Baidu’s share price halve and Alibaba’s and Tencent’s share prices end the year 10% lower.
An escalation of the trade war will likely affect all market sectors, because of the importance of both the US and Chinese economy to many businesses. However, the tech sector is most immediately vulnerable, and global mutual funds with a tech investment mandate or Asia funds with tech-heavy benchmarks have struggled.
For instance the MSCI Asia ex-Japan index, which has broad sector and country inclusion, has a nearly 45% weighting to the tech sector (including Alibaba, which the MSCI designates as “consumer discretionary”). Funds benchmarked against the index have, on average, fallen 6.27% in dollar terms since the beginning of May.
Other sectors, such as specialist TMT, China and Taiwan funds authorised for sale in Hong Kong and Singapore have dropped 6.44%, 7.51% and 8.78% respectively since 1 May.
Their one year performance has also suffered, with the recent sharp declines reversing the recoveries enjoyed during the first fourth months of the year.
“Assuming China won’t retaliate by targeting other US technology firms, we estimate the US’s present restrictions would reduce industry earnings by low single digits for US tech, mid-single digits for Asia tech and mid-to-high single digits for Taiwan tech (in percentage),” according to Gantori at UBS.
