Navigating U.S.-China Trade Tensions: Strategies for Low-Leverage Investments

Sectoral Impact of U.S.-China Trade Tensions

U.S.-China trade tensions have led to sector-specific challenges: Apple faces sales declines due to currency fluctuations, Boeing sees stalled trade relations, Tesla localizes its supply chain, Intel expresses operational concerns, and Caterpillar anticipates low demand in China for heavy machinery.

"The weakness in the renminbi relative to the U.S. dollar had an unfavorable year-over-year impact on Greater China net sales during the second quarter and first six months of 2024." --- (AAPL, sec filing, 2024/Q2)

"Overall, the U.S.-China trade relationship remains stalled as economic and national security concerns continue to be a challenge." --- (BA, sec filing, 2024/Q1)

"We pride ourselves to be the company with the most American-made cars and are continuing our journey to further localize our supply chain, not just in the U.S., but in Europe and China as well for the respective factories. As always, our focus is on providing the most compelling products at a reasonable price." --- (TSLA, earning call, 2024/Q2)

"And we are one of the few companies in any industry that have accomplished that coming out of China that gives us too much concern." --- (INTC, conference, 2024/05/30)

"We anticipate demand in China will remain at a relatively low level for the above 10-ton excavator industry." --- (CAT, earning call, 2024/Q1)

Supply Chain Adjustments and Sectoral Responses

Companies are enhancing supply chain resilience through various strategies: Honeywell is improving aerospace output despite margin pressures, Walmart is securing long-term supplier agreements, Nvidia is diversifying manufacturing locations, IBM is driving supply chain transformations, and Amazon is integrating end-to-end supply chain solutions.

"Aerospace supply chain improvements remain on track as output increased by 14% in the second quarter, the eighth consecutive quarter of double-digit output growth. Segment margin in Aerospace Technologies contracted 60 basis points year-over-year to 27.2%, driven by expected mix pressure within our original equipment business, partially offset by commercial excellence net of inflation. For Industrial Automation, sales fell 8% organically in the quarter, primarily due to lower volumes and warehouse and workflow solutions, but overall sales improved 1% sequentially." --- (HON, earning call, 2024/Q2)

"And so we're really proud of our position from a supply chain standpoint. We worked diligently to provide resilience across the food supply chain over the past couple of years. I'm working on a number of initiatives, Doug, things like long term agreements with our suppliers to make sure that they can make the investments they need to secure future food supply, working diligently in things like sustainability across the key stakeholder groups to equip farmers to make sure that our food supply is steady for years to come." --- (WMT, event transcript, 2024/06/05)

"While we work to enhance the resiliency and redundancy of our supply chain, which is currently concentrated in the Asia-Pacific region, new and existing export controls or changes to existing export controls could limit alternative manufacturing locations and negatively impact our business." --- (NVDA, sec filing, 2025/Q1)

"Turning to our lines of business. Business Transformation revenue grew 3%, led by supply chain and finance transformations." --- (IBM, earning call, 2024/Q1)

"And then I would say that supply chain with Amazon is really an abstraction on top of those individual building block services I just mentioned that makes it easier for customers to have the whole end-to-end supply chain integrated." --- (AMZN, earning call, 2024/Q1)

Geopolitical Risk and Government Policies

Geopolitical risks and government policies significantly impact investments, as seen with JD.com's concerns over enhanced supervision and data privacy scrutiny, and Alphabet's heightened regulatory and litigation risks. These factors underscore the profound influence of geopolitical tensions and regulatory environments on investment strategies.

"of laws, regulations and governmental policies that could adversely affect the industries in which JD.com or its business partners operate, including, among others, initiatives to enhance supervision of companies listed on an overseas exchange and tighten scrutiny over data privacy and data security; risks associated with JD.com's acquisitions, investments and alliances, including fluctuation in the market value of JD.com's investment portfolio; natural disasters and geopolitical events; change in tax rates and financial risks; intensity of competition; and general market and economic conditions in China and globally." --- (JD.com, press release, 2024/05/23)

"Heightened geopolitical conflicts have increased the need for air cargo and improved its relative economics." --- (GE, earning call, 2024/Q1)

"While the societal risks seem clear, the risks to investors are also profound. Alphabet has been subject to heightened regulatory and litigation risk in recent years." --- (GOOG, event transcript, 2024/06/07)

"policies that could adversely affect the industries in which JD.com or its business partners operate, including, among others, initiatives to enhance supervision of companies listed on an overseas exchange and tighten scrutiny over data privacy and data security; risks associated with JD.com's acquisitions, investments and alliances, including fluctuation in the market value of JD.com's investment portfolio; natural disasters and geopolitical events; change in tax rates and financial risks; intensity of competition; and general market and economic conditions in China and globally." --- (JD.com, press release, 2024/05/27)

"As long term shareholders we want Alphabet to succeed over the long run which means our company must do what it can today to mitigate the generative AI risks of tomorrow not only the risk to society but to the company itself regulatory risk, legal risk, reputational risk, these are only a few and while Alphabet touts its current reporting we've only seen principles and platitudes." --- (GOOG, event transcript, 2024/06/07)

Risk Mitigation Strategies

Corporate leaders are increasingly adopting sustainable business practices to mitigate risk and create value. Financial institutions are employing strategies such as purchasing credit protection, placing deposits with highly rated banks, and using netting arrangements and collateral agreements to manage credit risk exposures.

""There may yet be challenges in developing expertise and financing models, but corporate leaders view sustainable business practices as fueling the creation of value as well as the mitigation of risk." A majority of survey respondents (85%) see sustainability as a value creation opportunity for their long-term corporate strategy, and half of companies say it is a "very significant" reason for pursuing a sustainability strategy." --- (MS, press release, 2024/05/21)

"Risk Mitigation We purchase credit protection to cover the funded portion as well as the unfunded portion of certain credit exposures." --- (BAC, sec filing, 2024/Q1)

"We seek to mitigate the risk of credit loss, by placing substantially all of our deposits with highly rated banks and central banks." --- (GS, sec filing, 2024/Q1)

"Where possible, the Firm seeks to mitigate its credit risk exposures arising from derivative contracts through the use of legally enforceable master netting arrangements and collateral agreements." --- (JPM, sec filing, 2024/Q1)

"But as the NCL rates approach steady-state levels and the mitigating actions that all of us have been putting in place against the industry headwinds as those take hold, we expect the returns will improve and support the medium -- the firm-wide medium-term targets. In the retail bank, we're continuing to focus on growing share in our six core markets and we're doing that leveraging our physical and digital assets and it plays an important role in enabling the wealth continuum and the growth that we are looking at in our Wealth franchise." --- (C, earning call, 2024/Q2)

Technological and Innovation Shifts

Semiconductor companies are accelerating innovation and collaborating with industry leaders to maintain technological leadership. They are focusing on advanced process technologies, flexible manufacturing, and high-margin AI products to navigate U.S.-China trade tensions and drive growth.

"Our ability, and that of our suppliers, to develop or maintain leading process technologies, including transitions to smaller geometry process technologies (which adds risk to manufacturing yields and reliability), and to effectively compete with the manufacturing processes and performance of our competitors, could impact our ability to introduce new products and meet" --- (QCOM, sec filing, 2024/Q2)

"And we have accelerated our roadmaps to deliver even more innovation across both our Instinct and Epic portfolios, while also working with an open ecosystem of other leaders to deliver industry leading networking solutions." --- (AMD, event transcript, 2024/06/03)

"We work closely with our customers to plan our capacity. We also have a rigorous and roll-out system that evaluates and judges market demand from both a top-down and a bottom-up approach to determine the appropriate capacity to build.Our capital investment decisions are based on four disciplines, that is, technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning a sustainable and healthy return." --- (TSM, earning call, 2024/Q2)

"As we look ahead to 2025, demand for AI PCs and AI smartphones and continued growth of AI in the data center creates a favorable setup that gives us confidence that we can deliver a substantial revenue record in fiscal 2025, with significantly improved profitability underpinned by our ongoing portfolio shift to higher-margin products." --- (MU, earning call, 2024/Q3)

"Yes, we'll have the innovation power because there is so much value being created through semiconductors and it ends applications, which will only go on to exponentially grow." --- (ASML, event transcript, 2024/04/24)

Future Outlook and Investment Predictions

The future outlook for investments remains positive, with resilient economic indicators and declining default rates. Investment-grade issuance is expected to be strong, though potentially front-loaded. Despite geopolitical risks, opportunities persist, particularly in index businesses, suggesting a cautiously optimistic investment environment for 2024.

"I'll start with our outlook on the current economic environment. Recent data, including sustained consumer spending and labor force strength, suggests that the US Economy remains resilient, despite heightened geopolitical risks and a higher cost of capital." --- (NDAQ, earning call, 2024/Q1)

"From a macroeconomic standpoint, we have a positive outlook for the remainder of the year and expect global GDP to be between 2% and 3% for the full year.Our June default report, which was just published last week, is signaling that global default rates peaked in April and will continue to decline gradually in the coming 12-months." --- (MCO, earning call, 2024/Q2)

"Now in investment grade, a very strong quarter, but we think a lot of that investment-grade issuance is pulled forward in the second half of the year." --- (SPGI, earning call, 2024/Q1)

"it is not – is the investment risk and investment opportunity. No matter what people say, what people politicizes or whatever is part of the fabric of investing as to how you are going to manage the portfolio with respect to all these factors in addition to financial factors and other market factors." --- (MSCI, earning call, 2024/Q1)

"Looking forward to the full year 2024 revenue, due to the market backdrop negatively impacting corporate solutions, We expect growth in Workflow and Insights to be below its medium term outlook, whereas the strength in our Index business gives us confidence that within 2024, we can perform above our medium-term outlook." --- (NDAQ, earning call, 2024/Q1)