The trade war is back, and it’s weighing on markets. For most of 2019 so far, top trade officials from both the U.S. and China had been sounding a positive tone regarding U.S.-China trade talks, and the market widely believe that a deal was a sure thing. But trade talks took a step back last week as U.S. President Donald Trump claimed that China “broke the deal”, and then subsequently raised tariffs on imported Chinese goods from 10% to 25%.
Ever since, financial markets have tumbled.
To be sure, the tariff increase has a grace period, so goods that are in transit aren’t impacted by the tariff hike. That gives the U.S. and China trade officials roughly two weeks to negotiate a deal. If they do reach a deal in those two weeks, the 25% tariffs will go away without ever impacting a single import.
But that’s a big “if”, and until a deal actually happens, financial markets will remain in turmoil. The biggest losers? Stocks with ample exposure to China and international trade. These are the trade war stocks you’ll want to avoid over the next few weeks.
Which stocks fall into that category? Let’s take a look at 6 trade war stocks with too much risk.
One sector with ton of trade-war risk is the auto sector, and one company in that sector that looks particularly susceptible to escalated trade tensions is Tesla (NASDAQ:TSLA).
The whole growth narrative at Tesla has pivoted outside of the United States. Broadly speaking, Tesla had its big Model 3 demand surge in the U.S. in late 2018. Now, demand domestically is cooling. In order offset that cooling demand, Tesla is aggressively rolling out Model 3 deliveries globally. Because global demand is bigger than domestic demand, theory says this strategy should work.
But bigger tariffs and increased trade tensions throw a wrench in that growth strategy. Specifically, China is the biggest car market in the world, and Tesla needs that market to come alive in order to offset cooling U.S. demand. But until Tesla’s Shanghai factory comes online, the company’s China operations will be adversely impacted by bigger tariffs and escalated trade tensions. Thus, China won’t come online in any big way until those headwinds disappear, meaning this is a stock that will continue to fall so long as trade tensions remain high.
Much like Tesla, global retail coffee giant Starbucks (NASDAQ:SBUX) needs its China business to fire on all cylinders in order to keep the stock on a winning trajectory.
Long story short, despite slowing growth trends in the U.S. and Europe, SBUX stock has rallied to all time highs on optimism regarding the growth potential in Asia, specifically China. Management has talked up how under-penetrated the market is, and subsequently how long the growth runway is. Investors have rallied around this long term China growth thesis, and SBUX stock has popped.
But this bull thesis has a lot of trade war risk. Specifically, so long as tariffs and trade tensions remain escalated, the China economy will slow, and Starbucks will be disadvantaged relative to China coffee players like Luckin Coffee. This double headwind should ultimately weigh on Starbucks growth rates, and cause SBUX stock to drop off its all-time high levels.
An under-the-radar growth stock with a ton of trade war risk is robotic vacuum giant iRobot (NASDAQ:IRBT).
iRobot sells consumer household robots, with a focus on robotic vacuum cleaners. This is a strong growth market. Penetration rates are low, but growth is big, and the opportunity at scale is quite large. iRobot is also the biggest and most advanced player in this space, and has time and time again squashed competitive threats over the past several years. That’s why IRBT stock is up big in a multi-year window.
But more than 50% of this company’s revenues come from overseas, and a big chunk of that is from China. The company has already raised prices on its China products in response to the 10% tariffs. That weighed on the international business, and created a drag on gross margins. iRobot has promised it will lower prices if tariffs moved up to 25%. Thus, if tariffs do move up to 25%, iRobot’s prices will go down, and that will intensify the current international and profitability headwinds.
Shares of Boeing (NYSE:BA) have already been hit hard in 2019 by engineering and design questions following two fatal crashes of the company’s 737 Max planes. Elevated trade-war risks will only make the selloff more intense.
There are already reports running around that part of China’s retaliation efforts against higher U.S. tariffs will be to stop ordering Boeing planes. That’s a big deal. China is Boeing’s biggest international market, with revenues of $13.8 billion in 2018, or about 14% of total revenues. Further, China revenues rose 15% in 2018, versus U.S. revenue growth of 2%. Thus, China is a big and important market for Boeing.
If that market gets hit hard by tariffs, then Boeing’s numbers will take a hit. That will be on top of whatever hit the company takes from the 737 fall-out. Together, those two hits will create a big drag on BA stock.
General Motors (GM)
Tesla won’t be the only auto stock that trades down on elevated trade war tensions. Automotive giant General Motors (NYSE:GM) should trade down, too.
Why? Because General Motors has a ton of China exposure. In 2018, the company sold 3.6 million vehicles in China. That’s significantly more than the 3 million vehicles GM shipped in the U.S. in 2018, and comprises nearly 45% of GM’s global shipments. Thus, China is a big market for GM.
But the China auto market has been in free fall in 2019. Higher tariffs and increased trade tensions will only accelerate what is already a China auto market correction. If so, GM’s numbers will deteriorate, because GM has such broad China exposure. In response to falling numbers, GM stock will fall, too.
The world’s biggest company, Apple (NASDAQ:AAPL), is also one of the trade war stocks with the most exposure to escalating trade tensions and bigger tariffs.
Greater China is a $52 billion and rapidly growing business for Apple. Indeed, Greater China is the company’s third biggest market outside of Americas and Europe, and accounts for 20% of revenues. Further, China is key to unlocking additional growth for Apple, since the country is often seen as one of the few remaining markets that doesn’t have sky-high smartphone penetration rates yet.
But the Chinese market slowed in 2018, mostly because of trade tensions. Those tensions have cooled in 2019, and Apple’s China business has improved. But those tensions are rising again, and as they do, the 2019 improvements in Apple’s Chinese business may erode. If they do, AAPL stock will continue to fall.
As of this writing, Luke Lango was long IRBT and AAPL.