The Great Wall Is Hurting Wall Street

It’s funny how quickly public opinion changes.

Not too long ago, if you mentioned China, you’d hear excitement about the country’s growth and growth potential or excitement about new and innovative Chinese companies. It was justified, too…

Last June, I visited China, along with my colleague Steve Sjuggerud and a handful of Stansberry subscribers. We saw firsthand that China isn’t the poor, socialist Marxist economy many believe it to be.

Instead, the cities were seamlessly urban, and the countryside is moving that way. The trains and planes were better equipped and more comfortable than any seat on Southwest Airlines. Heck, I found a Burger King at the foothills of the Great Wall of China and Starbucks locations all over Beijing and Shanghai.

But in less than a year, a lot has changed. There’s a trade war between China and the U.S. And now, thanks in part to that trade war, there’s talk of slowing growth in China.

And with no end in sight to the trade war, we’ll see severe economic consequences.

In fact, we already are…

Guangzhou, China’s fourth-largest city by gross domestic product (GDP), is in the middle of China’s manufacturing and exporting heartland. And yesterday, it failed to meet its annual growth target for this past year.

Guangzhou’s mayor blamed the poor performance on private sector investment and sluggish exports. Foreign trade just grew by 1.2%.

Next year doesn’t look much better. Guangzhou also lowered its growth target for 2019.

It gets worse… Out of the 19 Chinese provinces and municipalities that released their economic growth targets for 2019, 12 lowered their targets. Only one raised its target, while six were unchanged.

China is worried.

Now, you might not have assets that depend on the Chinese economy. But there are a lot of U.S. stocks that have ties to China.

One of the most valuable companies in the world, Apple (AAPL), has taken a beating from the slowdown in China.

Earlier this month, the technology giant slashed its quarterly revenue forecast for the first time in over a decade. In a letter to investors, Apple CEO Tim Cook primarily blamed the cut on a downturn in iPhone sales in China.

Nearly 20% of the company’s sales come from China.

Since Apple became the first U.S. company to become a $1 trillion business back in August, it’s lost about $300 billion of market cap.

And Apple isn’t likely to be the only victim of China’s slowing growth. As earnings season kicks off this week, keep an eye on other companies that have a significant amount of exposure to China…

Company

Percent of Sales From China

Earnings Release Date

Qorvo

62%

1/30/2019

Texas Instruments

47%

1/23/2019

Apple

20%

1/29/2019

Boeing

19%

1/30/2019

Nike

17%

12/20/2018

Tapestry

14%

2/5/2019

It’s difficult to predict which companies will hurt the most and when, but companies relying on Chinese consumers could see a bigger hit to their sales.

We also need to look at competition. We saw that from Apple, where competition for smartphones is fierce in China. When money gets tighter, consumers tend to go with the least expensive phone, which isn’t typically an iPhone.

Taking the other side of the argument, there’s Nike. The company released its earnings in late December and had an outstanding quarter.

Nike sold $1.5 billion of goods in China for the quarter, or about $1 in every $6 of its total revenue. Its sales rose 31% year-over-year. There’s not a lot of competition for its sneakers in the Chinese market and it’s a not considered a luxury brand.

We’ll be watching these companies as they report earnings to get a feel of how U.S. firms are handling the slowdown in China. We think most reports won’t be a feel-good story like Nike’s. If you own stocks with a large percent of sales in China, be prepared.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
January 16, 2019