What You Need To Know About Chip Stocks In A Trade War
The ongoing trade tensions have already infused uncertainty in global US manufacturers, but chip manufacturers could particularly see their stocks drop.
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In stock trading and investing you need to anticipate what the future might bring, particularly when you’re deciding to investing in stocks of a particular industry. Right now you need to think twice before investing in the chip manufacturing industry. Trade Tensions Creating Uncertainty for Chip Stocks Chip stocks could be in a tightrope situation as a result of the trade tensions between the United States and China. The tensions have been aggravated with rumors about the Trump administration potentially prohibiting the sale of semiconductors to China by American companies. Now if this happens, there may be short-term as well as long-term consequences. What we could see in the short term is China cutting off its supplies of components that American chipmakers depend on. In the long term, analysts feel that China could decide to work towards becoming a semiconductor superpower to ensure its independence. That could cut short the global market share that American-based manufacturers have been enjoying.
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Even Chipmakers Not Directly Involved Could Feel the Heat Analyst Mark Kolakowski of Investopedia warns that companies not directly involved in these trade antics could also get affected. They could see their share prices plummet. The entire chipmaking industry can expect to feel the heat. For the last 10 years, the PHLX Semiconductor Index (SOX) has risen by 223%, through Monday’s close. The major components of the index are, in terms of market capitalization: Intel ($INTC) at $241 billion Taiwan Semiconductor ($TSM) at $197 billion NVIDIA ($NVDA) at $137 billon Texas Instruments ($TXN) at $100 billion Broadcom ($AVGO) at $94 billion Qualcomm ($QCOM) at $76 billion Micron ($MU) at $53 billion Combined, the market value these companies have is a whopping $898 billion. The rumored, potential move by Trump to prohibit semiconductor sales to China is being planned to prevent any
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kind of intellectual property theft. And since China depends heavily on the US for chips, the latter has the upper hand in the trade negotiations. But, as mentioned earlier, such a move would lead China to invest in its own chips to threaten America’s global monopoly in the chip manufacturing market. AI Chip Manufacturers Are Particularly Vulnerable Nvidia and AMD ($AMD) lead the way in chip manufacture for artificial intelligence (AI) applications. As a result, Barron’s analysts quoted by Kolakowski reveal that these companies could really feel the restrictions brought about if any export ban is enforced. AI has significant implications for national security, particularly when the US wishes to maintain AI leadership. The analysts also remind that the US Department of Commerce had already blocked sales of some of the Intel and Nvidia chips to the supercomputing industry of China back in 2015. The department had also blocked fiber-optic components from being sold to China recently. That time, the US fiber-optic manufacturers saw their share prices plummet.
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Prohibitions Can be Termed as Emergency Security Measures Barron’s analysts believe that factors such as IEEPA and CFIUS have come into play. IEEPA refers to the International Economic Emergency Powers Act which was enacted back in 1979 in the context of the Iranian hostage crisis. Trump could use this act to justify imposing any ban on selling semiconductors to China. Kolakowsky quotes former US trade representative Matt Gold as saying that IEEPA sanctions are usually imposed to prevent an American business from investing in a third country’s business that produces stuff for the targeted nation. Gold therefore believes that you could also potentially have American chipmakers being prevented from sharing their chip designs with other companies who are doing business with China. While Intel runs its own factories producing chips, Qualcomm and Nvidia outsource their production internationally, particularly to companies such as Taiwan Semiconductor.
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Another Likely Move The CFIUS refers to the Committee on Foreign Investment in the US. The CFIUS was responsible for preventing the Asian company Broadcom from taking over Qualcomm. Sensing that, Broadcom then shifted its corporate address from Singapore to the United States. With Barron’s reporting that Congress is looking to expand CFIUS rules, they could go to the extent making it more difficult for Chinese companies to invest in US firms. Much of the tech industry is in a state of uncertainty regarding the trade tensions between the United States and China. But it is the chip manufacturing stocks that would bear the brunt if the rumored move to prohibit semiconductor sales to China goes ahead.
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