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China Tariff Delays Put Semiconductor Stocks in Focus

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After a prolonged tariff war, the US and China seem to be heading for peace. On Wednesday, President Donald Trump announced through a tweet that he would delay the tariff hike on China.

Trump delays China tariffs

Trump had previously announced a tariff hike to 30% from 25% on $250 billion of Chinese goods starting on October 1. However, he postponed the increased tariff on China by two weeks after positive gestures from China. Now, a 30% tariff on Chinese imported goods would be imposed on October 15.

The tariffs would impact Chinese goods, particularly machinery, chemicals, and electronic components such as semiconductors and printed circuit boards. The tariffs would also affect China’s consumer goods and building products, including furniture, lighting fixtures, handbags, and vinyl flooring.

The delay in tariffs comes after the Vice Premier of China, Liu He, requested an extension. Notably, October 1, 2019, marks the 70th anniversary of the founding of the People’s Republic of China.

US stock futures surged more than 0.5% after the tariff delay news. On Wednesday, CNBC noted that the Dow Jones Industrial Average could open higher by more than 150 points on Thursday.

Volleys in the tariff war

This back-and-forth trade war has escalated since the beginning of September after China imposed an additional 5% or 10% tariff on $75 billion of US goods to become effective in September. In retaliation, Trump also moved ahead with 15% tariffs on $110 billion of Chinese imported goods starting on September 1.

Trump had planned to put an additional 10% tariff on $110 billion of Chinese goods starting in December. However, he increased the other duties from 10% to 15% and also moved these tariffs from December to September.

If the two parties do not reach a trade deal, Trump would also impose a 15% duty on about $160 billion of Chinese goods—including laptops, tablets, and cellphones—starting on December 15.

Yesterday, China announced that it would exempt 16 types of US goods from additional tariffs. The exemptions include anti-cancer drugs and animal feed. However, a large number of US exports to China—including pork, soybeans, and cars—are still under the pressure of hefty tariffs.

The tariff war has not only subdued the global market scenario but has also made nervous investors more jittery. Amid the trade tensions, the news of the China tariff delay comes as a relief for many US companies. This announcement comes when the two sides are preparing to hold trade talks next month to resolve the protracted trade dispute. The United States Secretary of the Treasury Steve Mnuchin and the US Trade Representative plan to meet Vice Premier Liu He in October.

Impact of the China tariff delay on chip stocks

China is the largest market for semiconductor players, particularly NVIDIA (NVDA), Advanced Micro Devices (AMD), Broadcom (AVGO), Micron (MU), Intel (INTC), and Qualcomm (QCOM). According to CNBC, chip stocks such as Qualcomm, Micron, and Broadcom generated more than 50% of their revenues from China in 2018.

Intel generated around 26.6% of its revenues from China in 2018. The additional tariffs on Chinese imported goods could raise the prices of graphics cards, hurting AMD and NVIDIA.

Chinese telecom giant Huawei is also a crucial customer of chip companies. Reuters reported that Qualcomm, Micron, and Intel generated $11 billion in revenues from selling components to Huawei alone in 2018.

However, the trade restriction with Huawei severely dented the chip companies’ sales. Micron generated nearly 13% of its overall revenue from Huawei in the first six months of its fiscal 2019. Qualcomm also suffered due to the Huawei trade ban.

In particular, US semiconductor companies hope that a trade deal could happen soon, as they are highly sensitive to trade wars. A delay in the China tariffs should also benefit US-based chipmakers to an extent.

The prospect of the resumed trade talks has also raised hopes that Trump might lift the trade ban on US companies to Huawei. Last month, several US companies applied to the US Department of Commerce for licenses to sell US goods to Huawei. Investors also expect the Fed to cut interest rates this month to boost the economy.

Let’s look at the major semiconductor players, as a series of upcoming events should impact the semi stocks. Any trade deal should accelerate the sales of these chip stocks in the near term.

Stock price movement

Year-to-date, AMD stock has gained the most and returned around 61.2% through September 11. Semiconductor stocks Micron, Qualcomm, NVIDIA, Broadcom, and Intel have returned 59.1%, 43.3%, 38.4%, 18.2%, and 14.7%, respectively, this year.

The S&P 500 and the VanEck Vectors Semiconductor ETF (SMH) have surged 19.7% and 39.5%, respectively, year-to-date.

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