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U.S., China to Reach a Trade Deal? ETF Areas to Gain

Sanghamitra Saha

Per the Wall Street Journal, Treasury Secretary Steven Mnuchin has been mulling over a proposal to lift some or all U.S. tariffs on Chinese goods in order to push trade talks between the United States and China.  

However, more hawkish members of President Donald Trump's trade team, including U.S. Trade Representative Robert Lighthizer, the lead negotiator with Beijing, is not supportive of such a move. Lighthizer has expressed concerns that eliminating the tariffs would place the United States in back foot in getting a favorable trade deal with China and waste the leverage the United States has on the Asian dragon, per Wall Street Journal, as quoted on businessinsider.

In the G-20 meet in December, China’s president Xi Jinping and U.S. President Donald Trump agreed to not announce any new tariff for until Mar 1. Trump had previously warned about raising the existing 10% tariff on $200 billion of imported Chinese goods to 25% in January 2019.

Now tariffs will jump to 25% post Mar 1, if the duo fail to reach a definite trade deal. And if such a deadly situation arises, HSBC estimates 4.5 percentage points would be off from 2019 earnings growth.

Still, we highlight a few ETFs areas that are likely to gain the maximum from the rising signs of a trade truce.

China & Asia

No wonder, Chinese equities will soar. The rally will also buoy equity benchmarks in Hong Kong and Shanghai. The Shanghai Composite Index has been one of the world’s worst benchmarks in 2018. However, the ceasefire will boost China ETFs like iShares China Large-Cap ETF FXI and Xtrackers Harvest CSI 300 China A-Shares Fund ASHR. Also, associated Asian nations and ETFs like iShares MSCI Hong Kong ETF EWH, Invesco BLDRS Asia 50 ADR Index Fund ADRA, iShares MSCI Japan ETF EWJ, iShares MSCI Australia ETF EWA, iShares MSCI Taiwan Capped ETF EWT and iShares MSCI South Korea Capped ETF EWY will feel the impact of this truce (read: Apple Woes Trigger Tech Sector Rout: ETFs Under Threat).

U.S. Markets

Futures of U.S. key indexes are showing that Wall Street is positioned for a green stretch. Investors should note that heightened trade disputes caused occasional upheavals in these key indexes in 2018. These are now trading at a beaten-down level and could stage a nice rally on the trade news. SPDR S&P 500 ETF SPY, SPDR Dow Jones Industrial Average ETF DIA and Invesco QQQ Trust QQQ are thus in focus.

Semiconductor

Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are exposed to maximum risks on rising trade tensions. The easing tensions may do some good to ETFs like VanEck Vectors Semiconductor ETF SMH.

Agriculture

Agricultural products like yellow and black soybean faced a retaliatory tariff. Notably, China purchases about half of the U.S. soybean and is the second-largest buyer of American cotton. News of a reconciliation between the United States and China should drive soybean prices. Teucrium Soybean ETF SOYB should thus gain (read: US Farm Belt at Risk on China Tariffs: ETFs in Focus).

Auto

U.S. auto companies earn about 12% revenues from China. With Beijing slamming tariffs on U.S. auto imports, First Trust NASDAQ Global Auto Index Fund CARZ was under pressure. Now, auto companies can hope for decent gains in the coming days (read: 5 Sector ETFs Most Exposed to Trade Tensions).

Civilian Aircraft

China’s list of levies includes aircraft. Notably, China is a key market for Boeing Co BA where it serves as the largest exporter of America. Thanks to trade tensions, China was feared to take harsh actions against such American companies. So, aerospace ETFs like iShares U.S. Aerospace & Defense ETF ITA can heave a sigh of relief for a while.

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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
 
iShares MSCI South Korea ETF (EWY): ETF Research Reports
 
iShares MSCI Japan ETF (EWJ): ETF Research Reports
 
iShares MSCI Hong Kong ETF (EWH): ETF Research Reports
 
iShares China Large-Cap ETF (FXI): ETF Research Reports
 
iShares MSCI Australia ETF (EWA): ETF Research Reports
 
iShares MSCI Taiwan ETF (EWT): ETF Research Reports
 
VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports
 
Invesco QQQ (QQQ): ETF Research Reports
 
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