eResearch | Although the various North American stock markets indices continue to reach for new highs, quarterly earnings are being released and some companies are citing recent trade wars for reduced revenue and earnings.
Starting in January 2018, the United States (U.S.) president, Donald Trump, as part of his “America First” economic policy to reduce trade deficits, implemented a series of tariffs on imports, including Canada, China, the European Union, and Mexico. In July 2018, President Trump imposed additional tariffs specifically on Chinese imports due to allegations regarding lack of regulatory oversight in trade practices and intellectual property theft. China and the other countries that were affected have since retaliated with tariffs of their own, causing increasing uncertainties in global markets and economies.
Multinational corporations and investors are apprehensive as media outlets are constantly saturated with news on negatively affected corporate earnings, reduced international investments, and fear of a global recession. Industries affected by the tariffs include agriculture, aircraft, automobile, plastic products, technology, and pharmaceutical, and retailers, such as Walmart (NYSE: WMT; LSE: 0R1W; DB: WMT), have warned that some extra costs will be passed on to consumers.
One of the industries impacted by tariffs and tariff threats is the automobile industry. Car manufacturers in Japan, Canada, Mexico, Germany and South Korea, representing over US$150 billion of car purchases, and car part manufacturers, representing a US$350 billion industry, are concerned with trade negotiations using tariff threats as a bargaining tool. Magna International Inc. (NYSE: MGA; TSX: MG; DB: MGA), a Canadian multinational automotive parts manufacturer, is continuing to struggle in 2019 as U.S. tariffs on Canadian steel and aluminum are forcing a difficult position as it does not have many options to get offsets for the materials. Magna is also worried about large capital investments that were made based on long-term strategies in stable domestic and global environments. However, the recently signed U.S.-Canada-Mexico trade agreement, which encourages increased operations and investments in North America, may be a supporting catalyst for Magna as it is the largest supplier there.
Technology is also at the center of the trade conflict and has drawn in both hardware and software companies. U.S. technology companies’ input costs are increased by tariffs or when manufacturers shift production to non-tariff but higher-cost countries. Micron Technologies, Inc. (NASDAQ: MU; LSE: 0R2T; DB: MTE), a semiconductor company, had already been struggling due to an oversupply of computer memory products when it was hit by the trade wars, which put a large downward pressure on memory product prices, reducing margins. Due to all these external pressures, in June, Micron’s stock price plummeted to US$32.43 from May’s high of US$43.33. During the FQ3/2019 Earnings Call at the end of June, Micron stated that they have mitigated 90% of the impact from tariffs; consequently, the gross margins impact was less than 30 basis points. However, during the call, management could not estimate the impact of $300 billion of additional tariffs that are proposed. Regardless, after FQ3/2019 earnings were released and Micron reported US$4.79 billion in revenue, beating analysts’ consensus estimates of US$4.69 billion, its stock price subsequently hit a yearly high of US$47.19.
During the current trade war and political battles over the arrest of a Huawei executive last year, the farm belts in U.S. and Canada have become collateral damage. In the U.S., soybean exports have decreased by more than 80% since China imposed tariffs in July 2018 and China shifted soybean purchases to Brazil. In Canada, Maple Leaf Foods Inc. (OTC: MLFNF; TSX: MFI; LSE: 0V5G; DB: M1L), a consumer meat company, recently took a hit in June when China announced that its inspectors detected ractopamine residue, a restrictive feed additive, in a Canadian meat product, resulting in a temporary suspension on all meat imports to China from Canada. Maple Leaf Foods has since announced that it does not use ractopamine in its pig production operations, and that it will work with government officials to resolve the issue with China. Investors fear that high tension between the U.S. and China will trickle down to Canada’s relationship with China, making it difficult to quickly resolve the meat ban.
Even financial services firms aren’t completely immune to the tariff and trade wars. Goldman Sachs Group Inc. (NYSE: GS; LSE: 0R3G; DB: GOS), an investment bank, lowered their U.S. GDP forecast by 0.5 percent to 2 percent on concerns of an economic slowdown as investors and clients become increasingly risk averse due to global trade uncertainties. Goldman also stated that it anticipates nominal effects to U.S. corporate profits, as there is not enough exposure to Chinese markets for it to have any serious material effects to profits. During Goldman’s Q2/2019 Earnings Call, management stated that the markets were “overshadowed” by geopolitical uncertainty, fixed income markets were impacted by “quiet” client activity, and retaliatory tariffs from China and Mexico increased the fear of reduced economic growth. With multiple divisions’ reporting quarterly revenue decreases year-over-year, Goldman surprised the street and beat analyst consensus estimates as it reported US$9.46 billion in revenue compared with US$8.8 billion in Q1/2019, however revenue was flat year-over year when it reported US$9.40 billion in Q2/2018; earnings per share was US$5.81 compared with US$4.93 per share in Q1/2019.
In addition to corporations in both Canada and the U.S. being negatively affected by tariffs and product bans from China, according to data research firm Rhodium Group, China’s investors have also reduced investments in the U.S. by almost 90% to US$5.4 billion in 2018 compared with US$46.5 billion in 2016, which was an all time high. Even so, Goldman Sachs confidently stated in a recent report that U.S. corporate companies will not be seriously damaged by China’s tariffs and will be able to easily recover.
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Goldman Sachs Group Inc. (NYSE: GS; LSE: 0R3G; DB: GOS)
Headquartered in New York, United States, Goldman is an investment bank and financial services company known for being one of the largest investment banking enterprises in the world, and is a primary dealer in the United States Treasury security market. GS currently trades at US$214 with a market capitalization of US$78.29 billion.
Magna International Inc. (NYSE: MGA; TSX: MG; DB: MGA)
Headquartered in Ontario, Canada, Magna is a multinational automobile manufacturer known for becoming the largest automobile parts manufacturer in North America by sales of original equipment parts in 2014. MGA currently trades at US$48.06 with a market capitalization of US$15.26 billion.
Maple Leaf Foods Inc. (OTC: MLFNF; TSX: MFI; LSE: 0V5G; DB: M1L)
Headquartered in Mississauga, Canada, Maple Leaf Foods is consumer packaged meats company that was founded in 1927 through the merger of several major Toronto meat packers. MFI is currently trading at US$22.77 with a market capitalization of US$2.83 billion.
Micron Technologies, Inc. (NASDAQ: MU; LSE: 0R2T; DB: MTE)
Headquartered in Idaho, United States, Micron is a computer memory and computer data storage manufacturing company boasting over 34,000 employees in 18 different countries. Micron generates approximately 90% of its sales internationally. MU currently trades at US$47.19 per share with a market capitalization of US$52.09 billion.
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