China Becoming Third Rail for US Megacap Investors

A resurgence of geopolitical tensions with China has some investors steering clear of megacap tech stocks exposed to the world’s second-largest economy.

(Bloomberg) — A resurgence of geopolitical tensions with China has some investors steering clear of megacap tech stocks exposed to the world’s second-largest economy.

With the Chinese government’s position on Apple Inc.’s iPhone seen as the latest challenge in a market once regarded as a nearly inexhaustible source of growth, it’s sparked investor concerns that the situation could worsen — sending money flowing out of shares of firms including Apple and Nvidia Corp. this month.

“We have purposely tried to not have any China exposure. We are significantly underweight,” said Hans Olsen, chief investment officer at Fiduciary Trust Company. “That’s driven by concerns over investor protections, the country’s economic competition with the West, and the simple reality that China is not the growth engine it once was.”

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At the same time, investors are picking up megacap technology names without China exposure. Shares in firms including Alphabet Inc. and Meta Platforms Inc. — both of which are blocked from operating in China — have outperformed of late, as has Amazon.com Inc., which exited the country.

News that China planned to expand a ban on iPhones to state-backed companies and agencies triggered a sharp two-day drop in shares of Apple last week. The firm derived nearly 19% of its 2022 revenue from the greater China region, according to data compiled by Bloomberg.

“China’s iPhone move suggests things could become incrementally more difficult for Apple or other companies with large chunks of China revenue,” said Patrick Burton, a portfolio manager at Winslow Capital Management. “If this tension escalates, then heaven help us. All bets are off.”

Burton owns both Apple and Tesla Inc. stock, but in order to manage China-related risks, he is underweight the pair relative to their size in the Russell 1000 Growth Index.

“Given the current state of China risk, I think capital will flow into the stocks that won’t see their businesses impacted, which means that Alphabet, Meta, and Amazon should all benefit,” said Burton.

Read More: Apple’s China Troubles Catch Fund Managers Chasing Rally

Amid broader concerns over China’s sputtering economy, investors have recently shifted equity allocations toward the US, according to Bank of America’s latest global fund manager survey. It said the “avoid China” theme has become one of the biggest convictions among its surveyed investors.

Apple isn’t the only megacap with significant revenue exposure to China, to say nothing of the country’s centrality to manufacturing. Both Tesla and Nvidia get more than 20% of their revenue from China, and it is a key market for semiconductor companies in particular. Broadcom Inc.’s China revenue exposure is 35%, while that of Qualcomm Inc. exceeds 60%.

Revenues taking a hit, or the potential expense of having to reconfigure supply chains should tensions mount, could weigh on the stocks of companies with exposure, according to Olsen.

“Neither are very encouraging for any company with exposure to China. This issue is hanging over all of them, and it has to be priced accordingly,” he said.

Tech Chart of the Day

Amazon.com shares have rallied 72% this year, with the stock trading at its highest since April 2022. The rally could have more room to run given an improving picture for profitability, according to Morgan Stanley. The company has three levers that can improve North American retail profitability, and if this plays out, Amazon “shares could have 20-60% upside from here,” wrote analyst Brian Nowak.