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After years of on again, off again talks that often sapped riskier assets in both countries, the U.S. and China finally inked "phase one" of a trade package on Wednesday. At the heart of the agreement are pledges by China to boost purchases of an array of U.S.-produced commodities, including agricultural and energy goods, and to lay off pilfering technological intellectual property.
It's hoped that phase one serves as a starting point for a broader trade deal or, at the very least, talks on "phase two" at some point later this year. That could be a long way off and while stocks didn't exactly set the world on fire, there remain some compelling ideas when it comes to post-phase one investment opportunities.
Here are some exchange traded funds to consider as the U.S. and China continue to make nice on trade.
KraneShares CSI China Internet ETF (KWEB)
The issue with the KraneShares CSI China Internet ETF (NYSE: KWEB) isn't the potency of the trade deal or subsequent sanguine environment, but how much gas in the tank this ETF has over the near-term. With KWEB up 10.74% to start 2020, it's relevant point to ponder.
Home to the likes of Alibaba (NYSE: BABA), JD.com (NASDAQ: JD) and Tencent (OTC: TCEHY), KWEB is more dependent on China's drive toward internal consumption than the country's export story. On that note, expectations that China's economic growth will slow this year appear baked into equities at this point.
“Morgan Stanley predicts China’s real GDP growth rate to slow somewhat to an even 6% versus 6.1% in 2019,” KraneShares said in a recent note. “The slight slowdown can be mainly attributed to deleveraging combined with an uptick in overall inflation in the first half of 2020. 2019 saw targeted monetary easing, which we suspect will be continued in 2020.”
VanEck Vectors Semiconductor ETF (SMH)
The VanEck Vectors Semiconductor ETF (NYSE: SMH) and rival semiconductor funds were among last year's best-performing ETFs, perhaps a sign that markets forecast phase one becoming a reality. Even with the initial part of the trade package set, there still some concerns the White House could lob more tech-related tariffs at China and that would pinch chip stocks, a group that has displayed sensitivity to tariff talk.
China is undoubtedly a vital market for domestic chip makers, accounting for $75 billion, or 36% of sales, in 2018, according to the The Wall Street Journal.
The issues for SMH and friends this year boil down to semiconductor demand, which should be supported late in the year by 5G smartphones and video game consoles, whether China adheres to the aforementioned intellectual property pledge and if Phase I of the trade accord proves impactful enough to stoke talks on Phase II after the U.S. elections in November.
Remember, the Commerce Department is still hoping to “eliminate a loophole that would let U.S. companies, through their overseas facilities, sell to Huawei Technologies, a company the U.S. put on its export restrictions list last year,” reports Barron's.
Global X MSCI China Information Technology ETF (CHIK)
On a related note to SMH, there is the Global X MSCI China Information Technology ETF (NYSE: CHIK), a basket of Chinese technology that has shown sensitivity to trade wranglings. It did on Wednesday, jumping 1.5% on heavy volume to extend its 2020 gain to 9%.
“Delays in additional tariffs and a potential trade détente helped Chinese equities broadly, but disproportionately benefited the sectors that are most exposed to tariffed areas like Info Tech (CHIK), which is a sector dominated by electronics, semiconductors, and software firms scrutinized for intellectual property theft and forced technology transfers,”Global X said in a recent note.
Looking further out, it can be surmised CHIK could be in store for significant upside if the technology issue is addressed in meaningful fashion in phase two talks, assuming those discussions take place.
Photo credit: Andy Mitchell, Flickr
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