One of the troubling things about the financial media is the lack of action.
I watch some of the morning shows; unfortunately, the headline stories are both hyperbolic and inactionable.
I want to shake my screen. If the story they are pushing is so important, they should tell viewers how to trade it. Whether it’s headline inflation, rising corn prices, or crashing lumber prices, I always think: What is the trade? How do I invest?
It appears that journalism and finance don’t always mix well.
One of the most important stories I’ve been following centers around China. While COVID has been the major theme for more than a year, there’s another underlying current that could shock the markets very soon.
I’m talking about the brewing Cold War around technology between the world’s two largest economies.
Today, I’ll discuss it. But more importantly, I’ll show you how to trade around it.
How a Cold War Heats Up
Right now, investors are talking a lot about the ongoing semiconductor shortage. I’ve discussed this as well, but in a much different fashion.
You see, media outlets are blaming supply chain challenges, poor auto manufacturing projections, and a labor shortage for the current semiconductor shortage.
But people aren’t talking about the real elephant in the room.
Relations between the United States and China are strained. This ongoing conflict has created huge problems for both nations’ hardware production, social media companies, and even agricultural producers.
The Trump administration aimed to level the playing field a few years ago. It blocked Chinese companies from the U.S. market and raised significant concerns about cybersecurity and privacy. Such efforts have continued into the Biden administration’s foreign policy.
Biden’s administration has moved to block certain Chinese companies from sourcing certain tech components produced in the U.S. In addition, they have barred financial transactions with some businesses. The White House has even moved to regulate underwater cables on which telecommunications companies in both nations depend.
This is a rare bipartisan issue these days.
Both Democratic Sen. Ed Markey and Republican Sen. Marco Rubio just praised a big decision by the Federal Communications Commission (FCC).
Yesterday, the FCC voted unanimously to ban equipment purchasing proposals across U.S. networks for Chinese companies. The reason: Chinese companies might threaten national security.
Such companies include semiconductor giant Huawei and phone manufacturer ZTE, two massive Chinese tech companies.
China has said the FCC’s decision is “misguided and unnecessarily punitive.” But China’s Communist Party had restricted American technology exports to China long before the ruling.
This Cold War will cost many companies billions of dollars.
But it’s not just the money that’s at stake. It’s what money enables.
If you talk to U.S. tech executives, they’ll tell you that lost sales from China will impact the budgets for research and development.
The United States is the global leader in the semiconductor market. However, broad access to foreign markets enables innovation to occur.
Innovation is what allows a nation to remain at the forefront of an industry.
But U.S. and Chinese companies are about to take a big hit. Boston Consulting Group (BCG) said that the U.S. semiconductor industry hit $226 billion in 2018. And U.S. companies controlled 48% of the market that year.
But the combination of competition from other nations like China and this brewing Tech Cold War could take a hammer to U.S. market share.
BCG projects that U.S. semiconductor industry revenue could fall to $190 billion due to this Cold War.
And market share would decline to about 40%.
In a worst-case scenario where the U.S. completely bans American semiconductors from flowing to China or China bans U.S. companies, the numbers are even more dire.
Revenue could fall to $143 billion for the U.S. semiconductor industry. That figure would represent about 30% of the market share.
Where and How to Invest
The tensions between the U.S. and China appear to be accelerating, not abating. However, the recent Group of Seven (G-7) conference of leading industrial nations suggested that Western nations are working together to tame China’s rise and influence.
While I love American tech firms like Intel Corp., Apple, and Nvidia, tech investors should listen up. Any acceleration in tensions will be bad for the bottom lines of these U.S. companies.
That’s why it’s important to look abroad and reduce any geopolitical exposure from one or two nations.
Remember, it’s a big world out there. So although there might be a desire to always focus on U.S. companies, you can look to other international tech companies.
They will look at this ongoing conflict as a way to increase market share and – naturally – innovation. A cheap stock that has some potential to exploit this Cold War is Nokia ADR (NOK).
This Finnish tech company has been stuck in neutral for a while. It’s largely been forgotten by investors as Apple and Samsung compete for the crown of most-loved mobile phone manufacturer.
But remember, Nokia was once the world’s largest manufacturer of mobile phones. Consider this company “neutral” in the geopolitical scenario. It could look to rebuild its brand and expand its presence in global markets.
This is a really interesting company, especially after its first-quarter earnings call.
Its increasing number of contracts suggests that it is gathering momentum. Recently, an analyst at research firm Liberum Capital wrote a glowing report on Nokia and suggested that it will complete its turnaround in 2022. The analyst also said that he believes the company actually was too conservative with its forward guidance for the year. That means there could be surprise upside here that even the firm’s executives are downplaying.
According to TradeSmith Finance, the stock is squarely in the Green Zone, which signals a buying opportunity. It also has positive momentum and is in an uptrend.
Next week, I’d like to discuss Tesla and an opportunity shaping up for investors.
Let’s dive into that story on Monday.
