The rivalry between the US and China looks set to dominate Asian affairs in the future and cannot be ignored by responsible investors. The escalation of tensions at the start of Donald Trump’s presidency led to an increase in trade barriers and impacted growth; now a temporary truce has been agreed but uncertainty remains, as do tariffs on Chinese exports to the US. The new bilateral agreement is a positive step, but investors should take a long-term view; the economic and strategic rivalry looks set to continue and some sectors are better placed than others to adapt to this landscape.

  • The tariff war between US and China has been defused
  • Period of consolidation predicted 
  • Asian semiconductor industry set to benefit as both countries seek strategic IT advantage 

The rivalry between the US and China looks set to dominate Asian affairs in the future and cannot be ignored by responsible investors. The escalation of tensions at the start of Donald Trump’s presidency led to an increase in trade barriers and impacted growth; now a temporary truce has been agreed but uncertainty remains, as do tariffs on Chinese exports to the US. The new bilateral agreement is a positive step, but investors should take a long-term view; the economic and strategic rivalry looks set to continue and some sectors are better placed than others to adapt to this landscape.

The first signs of a truce came in December 2019 when the US and China agreed to a partial easing of tariffs. This was formalised in January and enforced in February. The US reduced sanctions implemented in September 2019 on Chinese products from 15% to 7.5%. China responded with a relaxation of its tariffs on US goods. 

With a presidential election this year, the US will want to avoid an economic slowdown, while China needs to revive its domestic economy. Based on both countries, it is likely that tariffs will be lowered further. 

The momentum for this will be slow, as China will not want to appear to be giving too many concessions. Despite ongoing trade negotiations and possible tariff reductions it remains likely that both sides will remain embroiled in a power struggle.  

For the investment environment it is positive that both countries have decided to cut tariffs. This will lessen fears of a global economic slowdown and capital investment will probably recover. In the manufacturing sector inventory reductions are progressing smoothly and a cyclical recovery phase looks imminent (see figure). The Chinese government’s global fiscal policy for sustaining a low-interest-rate environment will support this movement, stimulate the economy and boost corporate profits. 

From a long-term perspective, the sectors most likely to weather the trade tensions – semiconductors and the electronics industry – represent a good bet. The evidence for this is apparent from recent history. Even though the trade war dampened capital investment, it has stimulated certain types of investment owing to US-Chinese attempts to outdo one other strategically. 

The high-tech sovereignty battle, which is symbolised by the entry of Chinese products onto the US Entity List (the list of restricted exports), has not only weakened Chinese companies but also made it necessary for both the US and China to invest more to gain an advantage. Keys to winning this competition for high-tech hegemony will be semiconductors, electronic components and 5G telecommunications, which underpin new information technologies, including artificial intelligence, and internet of things as well as cameras, sensors, software and supercomputers.

Katsunori Ogawa

Katsunori Ogawa

Stocks that look promising, given this, include Japan’s Tokyo Electron, a manufacturer of semiconductor manufacturing equipment and Murata Manufacturing, a Japanese manufacturer of electronic components based in Kyoto. Both companies announced in their Q3 2019 financial results that they are bullish on business conditions and the likelihood of expanding future earnings looks high. 

The use of semiconductors is expanding in both application and volume for use in data centres, industrial equipment and in-vehicle equipment. Semiconductor manufacturers also need high-functioning equipment to create higher performance inventory. With its advanced technology, Tokyo Electron provides competitive semiconductor manufacturing equipment with advanced technology. 

Tokyo Electron’s main customers are semiconductor manufacturers, such as TSMC in Taiwan, Samsung Electronics in South Korea, and Intel in the US. Although their direct sales to Chinese companies are not high, demand for the company’s products depend on China because of the volume of indirect sales to China via various countries.

Murata Manufacturing’s customers include Apple and Huawei, but the number of companies that require electronic components is large and the customer base broad. Murata’s main product is the Multi-Layered Ceramic Capacitor (MLCC) which is a chip-type capacitor boasting small size but larger capacity than alternatives. It is used in smartphones, data centres, and 5G in particular. It requires a considerable amount of electronic products for the base stations that transmit and receive radio waves.  

The trade war and Asia

On the other hand, factory automation (FA) and related businesses look set to struggle. Following the US’s decision to raise tariffs on China in 2018, the Chinese economy stagnated, which caused a global slowdown, with implications for car sales. This caused a decrease in capital investment by the auto industry, which in turn led to a downturn for FA-related companies receiving large orders from the automobile industry.

These companies are currently recovering, although it is likely to be gradual. One example is Yaskawa Electric. Yaskawa’s robotics provide machines for automation purposes, such as welding, painting, assembly, and transportation. Despite bottoming out in Q2 2019, its recovery has continued to be drawn out. This is because car sales have been sluggish, especially in China where sales have fallen year-on-year for 19 consecutive months, and there has been little capital investment.  

The FA sector also is structured differently to the semiconductor industry. The semiconductor industry is dominated by a small number of large manufacturers, while the FA sector is characterised by small to medium-sized enterprises. 

Overall, investors should be thankful for the truce but if the struggle does heat up again, companies producing products essential to strategic competition will remain a good bet. In contrast, sectors selling to consumers or which are dependent on businesses that do – which are dominated by small to medium-sized enterprises, such as factory automation – are liable to suffer further damage.

Katsunori Ogawa is manager of the Sakigake High Alpha fund at SuMi TRUST