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Huawei Woes Could Be A Boon For This ETF

ETF Professor

Chinese telecommunications giant Huawei s enduring significant controversy in the U.S. Recently, the Commerce Department blacklisted Huwaei, barring the company from buying chips from several major U.S. semiconductor companies.

Additionally, Alphabet Inc. (NASDAQ: GOOG) suspended its relationship with Huawei, meaning the Chinese company, one of the world's largest smartphone makers, does not have access to the Alphabet's Android operating system. Huwaei's woes open the door for competitors, namely Samsung, to steal market share.

“Turmoil from the US-China trade dispute brings Samsung Electronics Co., Ltd. (AA-/Stable) an opportunity to strengthen its position in the structurally weakening smartphone market, Fitch Rating says. “The loss of access to Google's Android operating system could significantly hurt Huawei Technologies Co., Ltd's smartphone sales outside China, which could help Samsung improve its market share.”

Why It's Important

Samsung is the largest of the 115 holdings in the iShares MSCI South Korea ETF (NYSE: EWY). The conglomerate accounts for over 22 percent of EWY's weight, more than quadruple the weight assigned to the fund's second-largest holding.

While Samsung may be able to capitalize on Huwaei's struggles, there is no denying South Korean stocks have been ensnared in the recent emerging markets downturn. This month, EWY is lower by 9.55 percent, meaning the South Korea ETF is performing 100 basis points worse than the MSCI Emerging Markets Index in May.

“Smartphone vendors shipped a total of 311 million units in 1Q19, the sixth consecutive quarter of decline,” said Fitch. “Huawei was the only major company to show growth with a remarkable year-on-year volume growth of 50%. Huawei solidified its market position as the second-largest smartphone manufacturer by offering a broad range of high-quality devices at attractive prices. Its shipment market share expanded to 19% in 1Q19 from 12% in 1Q18, closing the gap with Samsung's 23%.”

What's Next

It appears investors are, at least for the moment, not willing to wait for Huwaei's woes to benefit Samsung as highlighted by more than $166 million in second-quarter outflows from EWY.

“Huawei is also the biggest competitor of Samsung in the area of new generation smartphones such as 5G and foldable phones,” said Fitch. “US-Huawei trade issues may give Samsung an opportunity to acquire an early lead in these markets, although this will depend on how long the sanctions will last. UK and Japanese companies have followed suit in delaying the launch of Huawei's 5G smartphones, which could help boost the sales of Samsung and LG Electronics Inc.”

LG Electronics accounts for just over 1 percent of EWY's weight.

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