As we weigh sustained tariff and trade risks, how can we continue our efforts to protect assets through portfolio rebalancing while remaining alert to trading opportunities?
International investors will be important at the margin since they account for 18% of U.S. stock ownership.
The U.S. dollar retreat, down 10% in the last six months, and the emerging premium for U.S. bond markets are leading to higher yields (interest rates).
Short term, this is unlikely to threaten the greenback’s status since central banks hold almost $7 trillion worth of dollars in reserve, almost three times as much as euros. Furthermore, the $28 trillion Treasury market is the world’s largest and most liquid. In comparison, there are only $1.4 trillion in German government bonds outstanding.
Japanese officials are in Washington, D.C., to negotiate away the proposed 24% tariffs and the additional auto tariffs.
Both Japan and South Korea will be dealt with quickly since they are way too strategically valuable to be left hanging.
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How the U.S.-China tariffs work out this year is the million-dollar question.
Both sides are dug in, both have leverage, and both seem confident they will prevail.
This will likely take time, and there will be considerable collateral damage and trading opportunities.
One likely group that will suffer is American multinationals. A considerable number of these consumer giants, such as Nike (NKE), Tesla (TLSA), Intel (INTC) and Starbucks (SBUX) have over 20% of sales revenue coming from China.
The American market represents only about 14% of Chinese exports, and China’s roughly $20 trillion economy will be hurt but able to adjust to a loss of some of the $550 billion in exports it sent to the U.S. last year.
President Trump’s exception for smartphones and computers has already restored about a third of these exports. Cornell University reports that 73% of smartphones, 78% of laptops, and 87% of video game consoles sold in the United States come from China.
Chinese stocks are outperforming this year, and many have little international exposure, such as Luckin Coffee (LKNCY) and Chinese automakers, which sell virtually no cars in the United States.
Financial service companies will also likely avoid tariff issues such as American Express (AMEX) and Visa (V).
What cards can China play in this high-stakes diplomatic poker game?
China’s central bank also holds roughly $760 billion in U.S. Treasuries.
China has some $6 trillion of foreign exchange assets, if you include the holdings of state-owned banks.
China is putting American companies on restricted lists and has ordered that Chinese companies not receive any Boeing (BA) planes or aerospace parts and servicing.
China is also pushing back by restricting rare earths. Chinese state-owned companies have taken over all foreign-owned rare earth refineries in the country and have designated their techniques around rare earth mining and refining as state secrets.
China will now require special export licenses for six heavy rare earth metals, which are 90% refined in China, as well as rare earth magnets, again 90% of which are manufactured in China. According to the Defense Department, an F-35 fighter contains around 900 pounds of rare earth materials, and strategic submarines need more than 9,200 pounds.
I will be putting forth a new stock idea next week to Cabot Explorer subscribers that will benefit from intense U.S. efforts to become more independent in strategic materials such as rare earth processing. To learn about that company when the idea is published, subscribe to Cabot Explorer today.
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