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Wednesday, June 20, 2018

So Far Trade War Touches Tech Less

So far a majority of the products listed by the US and China have been in the agriculture and industrial segments. Officially, the war hasn't centered on tech. Not yet.

Another consideration is much of production for major tech companies happens outside the US and China.

While a trade war would raise prices and potentially slow end demand, so far, tech could get hit less.

US And China Target Ag And Industrial

The lists of goods targeted so far by both countries have mostly been outside of tech (here and here).

Semiconductor Supply And Demand Is Global

Source
China and North America make up about one-fourth of global production.

China and North America make up roughly under one-third of global demand.

It's meaningful but there is the chance that companies can shift production to lower cost regions if a trade war were to break out.

Economy Strong

A trade war would raise prices on goods making it more difficult for consumers to buy. The risk is a trade war slows the economy.

That said the economy has been picking up steam. The Atlanta Fed has been expecting a faster Q2 for US GDP.

There's the chance that a trade war would slow that acceleration but doesn't necessarily mean we fall into a recession based on that underlying strength.

We're Still In Negotiation Mode

Both sides (China and the US) are positioning but also racing to come to an agreement. A trade war would hurt everybody and nobody wants it. The louder we hear the crossfire the more it likely means they are desperate to negotiate.

Tech Accelerating

We've shown that revenues of major tech companies are accelerating (here and here). Based on our work we think that continues this quarter.

Capex spend by hyperscalers, which is a huge tech driver has also been accelerating.

The backdrop for tech is very strong so if the trade war is muted against tech or settled we think tech has some big upside.

Q2 Same Thing

We're bullish.  Based on our work speaking to many companies we feel Q2 can continue to see revenue acceleration which would drive earnings leverage.

If correct you have a big fundamental reason holding up stocks against trade war scares.


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We have no positions in the securities mentioned.

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