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5 Stocks in Focus on U.S.-China Partial Trade Truce

Nalak Das

On Oct 11, President Donald Trump met with Chinese vice premier Liu He and said in the Oval office that the United States has reached a “very substantial phase one deal” with China in a move to end the lingering tariff war between them. The statement came as a relief to market participants suffering from growing concerns over the U.S. and global economic slowdown owing to the fierce trade battle.

Partial Trade Deal in the Offing

According to President Trump, the first phase of the deal will address issues related to safeguarding of U.S. intellectual property rights, including force transfer or theft of technologies, reform of the Chinese financial markets and China’s practice of arbitrarily setting foreign-exchange rate. Moreover, China has agreed to purchase $40-$50 billion worth U.S. agricultural products.  

The U.S. government has decided to scrap its decision to raise tariff rates from 25% to 30% on $250 billon Chinese goods, mostly used as intermediaries for high-tech U.S. products, effective Oct 15. Also, no decision has been taken on the planned new set of 15% tariff on $160 billion Chinese exports, effective Dec 15.

President Trump said that the first phase of the deal will be signed within the next three weeks and the second phase will start almost immediately after the completion of the first part.

Several economists and financial experts remain skeptical about the partial trade deal since it has still not completely addressed the major concerns of the U.S. government like forced technology transfer and currency war. Yet, a temporary truce in the U.S.-China trade war, which has already lasted for more than a year, will act as a major driver for the market.

Wall Street welcomed the move as three major stock indexes ---- the Dow, the S&P 500 and Nasdaq Composite ---- rallied 1.2%, 1.1% and 1.3%, respectively.

Why Trade Solution is Important

China is the largest trading partner of the United States. Moreover, China plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries. U.S. companies that rely on Chinese imports are unhappy on higher tariffs on Chinese intermediary goods which raised prices of high-tech equipment and electronics products.

On the other hand, a trade spat with the United States resulted in a significant slowdown of China’s economy. However, a strong Chinese economy will give U.S. high-tech companies a solid boost as China is also the largest market for U.S. high-tech products.

A solution to the U.S.-China trade war is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, the repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. tech giants.

Other Likely Gains for the U.S.  

The U.S. Trade Representative's office said that China has given assurance of importing "a substantial amount" of agricultural, energy, and manufactured goods and services from the United States. The Trump administration wants China to lift tariffs on U.S. agricultural products or at least shift those to other products. If this happens, the trade deal will allow Trump to portray it as a win for U.S. farmers.    

Moreover, a strong economic and political relationship between the two countries will help U.S. companies, operating in other fields like restaurants, gaming and e-commerce segments to prosper in the future.

Stocks to Watch

The major gainers of a possible trade deal will be those companies that have a strong international exposure especially in China. We have narrowed our search to five such stocks which have moved higher in 2019 so far and still have upside. All five stocks currently carry either a Zacks Rank #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows price performance of five stocks year to date.

Microsoft Corp. MSFT is a global software giant offering operating systems for computing devices, servers, phones, and other intelligent devices, server applications for distributed computing environments, cross-device productivity applications, business solution applications, desktop and server management tools, software development tools, video games and online advertising.

The company has an expected earnings growth rate of 10.3% for the current year.  More than 10% of its revenues come from China. The stock carries a Zacks Rank #2 and has jumped 37.5% year to date.

KLA-Tencor Corp. KLAC designs, manufactures, and markets process control and yield-management solutions for the semiconductor and related nano-electronics industries worldwide.

The company has an expected earnings growth rate of 12.3% for the current year.  Around 27-30% of its revenues come from China. The stock carries a Zacks Rank #3 and has skyrocketed 79% year to date.

QUALCOMM Inc. QCOM designs, develops, manufactures and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies, Qualcomm Technology Licensing, and Qualcomm Strategic Initiatives.

The company has an expected earnings growth rate of 16.3% for the current year.  Around 30% of its revenues come from China. The stock carries a Zacks Rank #3 and has jumped 34.8% year to date.

YUM! Brands Inc. YUM develops, operates and franchises quick service restaurants worldwide. It operates in three segments: the KFC Division, the Pizza Hut Division and the Taco Bell Division.

The company has an expected earnings growth rate of 22.1% for the current year.  More than 10% of its revenues come from China. The stock carries a Zacks Rank #3 and has soared 24.5% year to date.

Deere & Co. DE manufactures and distributes farm equipment worldwide. The company operates through three segments: Agriculture and Turf, Construction and Forestry, and Financial Services. Agriculture and Turf equipment accounts nearly 60% of its revenues.

The company has an expected earnings growth rate of 6.1% for the current year.  The company has no exposure in China. However, China’s decision to substantially increase import of U.S. agricultural products is likely to boost its financials. The stock carries a Zacks Rank #3 and has surged 14.6% year to date.

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