After months of negotiations and setbacks, an initial trade deal with China is close. That’s good news. When it happens, I’ll cheer.
But even if there’s a breakthrough this weekend, it probably won’t play out the way a lot of investors hope. The concessions both sides are willing to make simply don’t add up to a win for U.S. exporters.
I’m not buying the stocks that do a lot of business in China. And I’m not buying the Chinese stocks that sell on either side of the Pacific Ocean, either.
The play here is different. Start with the terms that are actually on the table.
China wants to buy U.S. farm products. Food prices have gotten out of control, soaring 19 percent over the past year and forcing the government to tap its pork reserves to keep the people happy.
However, Beijing also wants to save face, so if it makes a concession, it needs Washington to give something up, too. That means lowering the trade walls.
Any rollback on U.S. tariffs won’t make it any easier for U.S. companies to sell their products in China. Their competitive landscape isn’t improving. So why are those stocks breaking records?
The China Scenario
The S&P 500 constituent with the biggest exposure to China is Wynn Resorts Ltd. (NASDAQ:WYNN), which does a lot of business in Macao.
The stock is up 12 percent this week amid the general buzz around trade and is now only 13 percent from a 52-week high. But it’s unclear to me how reducing tariffs on Chinese exporters translates into more money flowing into Wynn casinos.
Chinese factories will presumably run a little harder to keep shipping orders to U.S. customers. The boss’s decision to gamble in a U.S. casino or go elsewhere doesn’t change.
To be fair, I was never convinced that China was ever a problem for Wynn or the reason the stock plunged last year. Management turmoil was a much bigger factor.
But because the stock does so much business in China, people naturally took a look at the table of stocks ranked by revenue in the country and assumed that the trade war was to blame.
It wasn’t. A trade truce won’t help the company. I suspect this bounce is premature.
On the other hand, semiconductor manufacturers like Skyworks Solutions Inc. (NASDAQ:SWKS) truly do have a stake in the trade war, which is why they fell so hard last year.
As far as I know, there’s no proposal on the table to protect these companies and their markets. Instead, China is busy ripping out as much U.S. technology as it can find and replacing it with domestic alternatives.
That business is not coming back in a trade truce. And I would not buy these stocks either, especially now that they’ve already priced in a complete reversion to a free trade world.
Skyworks is practically at a 52-week high as it is. Any disappointment on trade will send it right back down.
So, what do I like? I like U.S. retailers who once again can sell Chinese products to U.S. consumers without paying a surcharge for the privilege. If tariffs roll back, these companies will keep the cash.
Start with Walmart Inc. (NYSE:WMT) and work down. These stocks lost a year while management retooled their supply lines. Now they’re more nimble than ever.
These are the kinds of stocks that dominate my Value Authority portfolio: insulated from real global shocks but beaten down by confused investor logic. When logic improves, the stocks soar.
And in a world of confused headlines and sudden changes, that clarity is precious… especially when you can buy it at a discount.
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