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China is no longer a copy cat

Sleeping giant awakes

24 June 2019
Author: Michael PowerStrategist

President Trump’s awakening the US giant might hold the dragon at bay, but can he stop it?


Rear-guard action only

No doubt President Trump and his tariffs, quotas and outright trade bans might slow down the achievement of China’s MIC2025 ambitions. But it is almost certainly too late for him to have any meaningful effect on China achieving its potential destiny. And stopping the flow of US semiconductors to China is very likely to backfire: by 2025, China will likely be self-sufficient in this niche too.

That the US has rather belatedly woken up to China’s re-emergence at the forefront of the race for higher knowledge is perhaps not a surprise. What might be a surprise is realising the role that America Inc played in assisting China in the process, dividing the US into a very unequal nation as it did so.

As Bob Dylan prophetically foresaw in his 1983 ballad, ‘Union Sundown’:

Well, it’s sundown on the union
And what’s made in the USA
Sure was a good idea
’Til greed got in the way…

The MSCI US Index has depended heavily upon the leadership of US Big Tech for its solid, even spectacular, performance since 2008. This logic has shown recent signs of failing, and for multiple reasons.

Figure 1: The technology sector has driven US earnings since 2008

Figure 1

Source: Source: Investec Asset Management, Bloomberg, MSCI as at 31.12.18


US Big Tech tailwinds to headwinds

US Big Tech has achieved its recorded profit growth at the earnings level because of five main drivers:

The low production cost of their hardware arising from their supply chain based upon contract manufacturers located in China.
The low production cost of their hardware arising from their supply chain based upon contract manufacturers located in China.The ‘efficient’ global tax planning involving especially Ireland that has substantially shielded offshore mark-ups from any taxation outside the US.
The effect of financial engineering arising from massive share buybacks on boosting both the demand for their shares and pumping up their earnings per share by reducing the number of shares in issue.
Until recently, having the world’s best hardware e.g. smartphones like Apple’s iPhone, in their categories.
Being able to sell their products into growing market segments that have not yet exhibited signs of saturation.


For much of US Big Tech – with Exhibit A being Apple – circumstances are conspiring to turn all of these tailwinds into headwinds. This does not bode well for the US stockmarket.

General risks: The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.
Michael Power
Michael Power Strategist

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