The Chinese Tech War Losers

In any war, there are winners and there are losers. Given that the U.S. China tensions have continued for a while and there is no end in sight, and that the U.S. government has put Huawei on its blacklist that prevents American companies from doing business with it, there are some losers from the deal. After writing about the potential winners of the Chinese tech war, let’s take a look at some of the potential losers and how elite funds are positioned among them.

Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 38 percentage points since May 2014 through May 15, 2019. Our best performing hedge funds strategy also returned 26.4% year-to-date and outperformed the S&P 500 Index by nearly 12 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Warren Buffett and Billionaires

Microsoft Corporation (NASDAQ:MSFT) does big business in China due to its Windows Operating system and the associated software on it. Although it is extremely difficult to challenge Window’s Desktop monopoly due to its network effects, Chinese companies could potentially turn more towards linux solutions in the Cloud and use more pirated software on Desktop if the tech trade war causes China to favor more home grown solutions. Microsoft could certainly lose revenue due to the Huawei ban. Microsoft is one of the hedge fund world’s most widely held stocks, not only for its size but for its performance in recent years.

Like Microsoft, Apple Inc. (NASDAQ:AAPL) also does big business in China. Apple generated around $13.2 billion worth of revenue from China in Q4 2018, or around 16% of the the company’s total. Some analysts estimate that Apple could lose in the worst-case scenario 29% in profit if the government there completely banned the sale of Apple products. Apple generally sells higher margin products in China, which explains why its profits would fall more than its revenue in that scenario. Warren Buffett is a big holder of Apple.

Chip makers QUALCOMM, Incorporated (NASDAQ:QCOM), Intel Corporation (NASDAQ:INTC), and NVIDIA Corporation (NASDAQ:NVDA) might also be losers if the war continued. For Huawei, according to the founder, the company is using half of its chips from the U.S. and half from its own sources. If the U.S. prevents Huawei from buying U.S. chips, the company would buy less chips from Qualcomm and Intel, and eventually there could be a Chinese competitor for NVIDIA, although some analysts think that scenario is at least 10 years away. Of the around 700-740 elite funds we track, 51 funds owned $2.27 billion of QUALCOMM, Incorporated (NASDAQ:QCOM) on December 31, versus 48 funds and $3.17 billion respectively on September 30. 65 elite funds owned shares of Intel Corporation (NASDAQ:INTC) at the end of December. 41 top funds were long NVIDIA Corporation (NASDAQ:NVDA) at the end of the fourth quarter, down 15 funds from the previous quarter.