I’ve been a longtime and consistent bull on Nokia (NYSE:NOK) and Ericsson (NASDAQ:ERIC), in large part due to the political winds. Particularly once the novel coronavirus spread around the world, it seemed likely that there’d be a major backlash against China. And indeed, in recent months, the Trump administration was making significant headway in its efforts to crack down on sensitive trade and security issues with China. That was great news for Nokia stock.
Now, though, we must take a second look. With the Biden administration set to take office soon, the future of China-U.S. relations is at a crossroads. Huawei, as one of China’s most controversial companies, will be a key issue in the relationship. And if Huawei gets a reprieve from the new administration., Nokia and Ericsson could be in serious trouble.
Nokia’s Golden Opportunity May Be Fading
The Trump administration gave Nokia and Ericsson a massive boost. By stating that Huawei was a national security risk, the U.S. kept Huawei out of America’s 5G market. Additionally, partly due to America’s sanctions on the company, some vital U.S. allies have chosen to avoid Huawei’s equipment as well.
That could all change starting in January however. President-elect Biden is likely to take a more conciliatory stance toward China. The Obama team, with Biden as VP, allowed largely unrestricted trade with China. And on the campaign trail, Biden criticized Trump’s trade tactics.
Under Biden, expect the U.S. to take a more predictable and moderate stance on trade. That’s even discounting the potential relationships between members of the Biden family and China.
That said, Biden is hardly a silver bullet for China either. Some analysts suggest that Biden’s emphasis on having products made in America will still be a big concern for China. That said, since Nokia isn’t based in the U.S., it could also be hurt by Biden’s “buy America push.”
In the meantime, Nokia failed to gain as much advantage as it probably should have while the climate was favorable. Its chief rival, Ericsson, took market share in the face of Huawei’s difficulties, and its stock price has gone from $6 to $12 over the past three years as it has benefited from the 5G deployment cycle.
Nokia has failed to keep up, both in terms of operations and its financial results. And now, with the potential for more competition from both a revitalized Huawei and newer entrants such as Samsung (OTCMKTS:SSNLF), Nokia will have to fight even harder.
Biden’s Course Isn’t Yet Set
It’s too early to be certain, though, of how the Biden administration will end up handling China. There is a lot more to the issue than what Joe Biden may personally think. For example, the heads of economic departments are vital to setting the tone, as they actually give the orders to rank-and=file employees. Arguably, Trump’s trade policy was one of his more effective areas of his administration precisely because he had two forceful leaders in Wilbur Ross at commerce and Steve Mnuchin at the treasury.
What do we know about Biden’s incoming cabinet heads? For the Treasury, he plans to tap former Federal Reserve chief Janet Yellen. She hasn’t expounded in great detail on her ideas about China in particular.
We do know that she is skeptical of tariffs, though she has concerns about Chinese industrial policy. How that translates to Huawei and Nokia, only time will tell. And, as of this writing, Biden hasn’t even announced a pick for the Commerce Department yet. So, the folks rushing to draw firm conclusions on Biden’s China policy are a bit premature.
The U.S. is far from the only actor in this puzzle, though. Other major players, such as the United Kingdom, have already banned Huawei’s 5G equipment this year. Those bans are likely to remain in effect regardless of what political swings may occur in the United States.
The Verdict on Nokia Stock
Ideally, Nokia could have gotten farther along in its turnaround before potentially losing the support of the American government. That said, some things did move in Nokia’s direction, such as the U.K’s. ban on Huawei’s gear.
Additionally, Nokia stock recovered from its lows below $2.50 earlier this year and trades around $4 now. While there had been hope for a bigger run, that’s on pause for now until we see how things start to play out in 2021
There’s potentially still a viable, positive case for Nokia. But at this point, it makes sense to wait for more clarity on the state of U.S.-Chinese trade relations before pressing one’s bets on the shares of Nokia or Ericsson.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.