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If you own investments in these two US sectors… Beware!

by , 20 May 2019
If you own investments in these two US sectors… Beware!
Isn't it amazing how one man can send shockwaves through global equity markets, just through a tweet.

That's what investors have to deal with when it comes to US President Donald Trump and his trade wars.

What's worse, there's no telling whether we've already witnessed the highest points of tension between the US and China in the battle over international trade.

If precedent has taught us anything, it's that nothing is certain when it comes to trade wars. Trump could escalate them today, tomorrow, next week…who knows?

But If a full-blown trade war between the two countries becomes a reality, some industries will be hit harder than others.

Here are the two most-vulnerable…

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#1: Carmakers will experience lower sales and job losses
The thing is, China is the second-biggest supplier of car parts to the US – accounting for around 12% of imports. So increasing tariffs will hurt US companies who are reliant on Chinese parts.
For example, electric vehicle producer Tesla, is feeling the pain.
US-based Centre for Automotive Research warned that “due to the automotive industry’s reliance on complex cross-border supply chains, any new barriers to trade will have a significant impact on the US automotive industry, consumer prices, and US sales, employment, and economic output”.
To put it in perspective, a 25% tariff would cost 366,900 US jobs in the auto and related industries. So in short, tariffs would be detrimental to the car industry.
#2: Tech giants’ costs will rise
Another sector that’s vulnerable to an escalation of tariffs is the technology sector – including semi-conductors and chip makers.
Major US chip makers and electronics manufacturers like Nvidia and Intel are in the firing line if trade wars escalate.
Firstly, even though almost half of the world’s chips are designed in the US, much of the output is sent for manufacturing to China. In China, Integrated Circuits (ICs) are assembled, tested, and packaged. Some of these then need to return to the US for the use in manufacturing.
Secondly, a large number of consumer electronics products are finished in China and then imported into the US. This means, prices on electronics imported to the US from China will increase. Consequently, US-based semiconductor suppliers will have to battle with the rising costs.
Tech companies like Apple also won’t be spared.
If Trump slaps tariffs on the remaining billions of dollars’ worth of Chinese goods, Apple may need to raise their iPhone prices significantly to offset the higher costs of parts.
JP Morgan estimates that “…a price increase of around 14% is required to absorb the impact of a 25% tariff”.
The bank also broke down the costs of making and selling the iPhone XS with no tariffs, which is about $1,000 vs. the cost if a 25% tariff hits China-made parts, which would push the retail price up to $1,142.
One way Apple can combat tariffs is to move production to the US. However, Bank of America Merrill Lynch estimates that prices would need to increase by 20%, if 100% of the phone is manufactured in the US.
Either way, these tech companies will feel the brunt of trade wars.
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Does this mean you should sell your investments in these two sectors?
Nobody really knows what goes on in Trump’s mind. He could escalate tariffs at any time. And if this becomes a reality, companies like Facebook, Intel, Nvidia and Tesla, will suffer in one way or another.
But, if you believe that these companies own game-changing technology that will thrive in the future, then there’s no need to sell your shares as they’ll continue to grow and make money.
In fact, at the South African Investor, we still expect to make good money from tech stocks during this late-stage bull market.
One tech giant we’ve betted on since the beginning of this year is, Alibaba. Its shares have increased over 20% so far this year – outperforming both the S&P and JSE. And recently, the company posted quarterly revenue and earnings that topped analyst estimates.
So there’s still great profits to be made, if you know where to look.
See you next week,
Joshua Benton,
Managing Editor, Real Wealth
P.S: Now, you can have it all – 24 hours a day – right at the tips of your fingers!

If you own investments in these two US sectors… Beware!
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