Investors Are Downplaying ‘Immense’ U.S.-China Damage, Jefferies Says

(Bloomberg) — Global equity investors are likely underestimating the damage from the U.S.-China trade dispute, Wall Street analysts say.

With the Trump administration putting Huawei Technologies Co. and dozens of its affiliates on an export blacklist , “the U.S. government has halted China’s 5G push,” transforming the trade war “into a digital one,” Sean Darby, Jefferies’s chief global equity strategist wrote in a note. And it’s likely to have ramifications beyond the tech sector as well, analysts at MKM wrote.

“The progression from tariffs to direct actions against single Chinese companies and their inter-linked supply chains has a wide-ranging impact on profitability that investors will find difficult to quantify,” Darby warned.

The Huawei ban “holds back the development of 5G (the largest global capex project) and the growth of Internet-of-things,” he said. It also “completely disrupts the global tech supply chain. The macro and micro implications are immense.”

Darby noted that 5G provides a “huge advantage” for “everything from the use of autonomous vehicles to AI eco-systems,” while “enormous amounts of money” are also required to install fiber-optic and operating systems.

China has been a 5G technology leader, but Chinese companies have an Achilles heel — their reliance on U.S. semiconductors and components with no alternatives, he said. Those include baseband chipsets for handsets, from Qualcomm (NASDAQ:) Inc. and Intel Corp (NASDAQ:).; semiconductors for base stations, from Xilinx Inc (NASDAQ:).; RF/power amplifier chipsets, from Skyworks (NASDAQ:) Solutions Inc., Qorvo Inc., Avago Technologies Ltd. and Macom Technology Solutions Inc., and optical components, from Lumentum Holdings Inc. and Finisar Corp.

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The Huawei blacklist “is a very important development and we suspect it has fallen through the cracks,” Cowen senior policy analyst Chris Krueger wrote in a note. He said that “a framework has now been put in place that could be extremely broad, disruptive, and restrictive.”

He sees the Commerce Department’s license process as “likely to take some time,” and suspects “nearly all requests will be denied.” He added that talks in Beijing with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are still unscheduled.

“It is very hard to see any off ramps before the June 28 Trump-Xi meeting in Japan at the G-20,” Krueger said. “A few more weeks like we had this week and that meeting may not even materialize.”

Earlier, China’s state media signaled a lack of interest in resuming trade talks, while the government said stimulus will be stepped up to buttress the domestic economy. That helped send U.S. index futures and European stocks lower. Qualcomm is dropping 1.9% in pre-market trading Friday, while Intel is down 0.5%, and the exchange-traded fund that tracks the Philadelphia Semiconductor Index fell 1.4%.

On Friday morning, Acacia Communications Inc. said it plans to fully comply with the Commerce Department’s Huawei order. As sales to Huawei have been less than 1.5% of total revenue, it sees a “de minimis impact” from losing those sales in the second quarter. But Acacia cautioned that “developments or regulatory actions against Huawei may have a broader impact on overall conditions” in its markets.

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