It has been a busy week on the trade war front as mixed signals have dominated headlines.
“The U.S. and China don’t know what they want to do on a trade deal,” said Charles Schwab vice president of trading and derivatives, Randy Frederick. “Every single day it’s something different. They’re close to a deal. Then they’re not close to a deal.”
Early in the week saw reports that China was pessimistic about moving forward on a possible trade deal considering U.S. President Donald Trump’s reluctance to roll-back tariffs on Chinese goods, while White House economic advisor Larry Kudlow said that the two sides are “getting close” to reaching an agreement.
By mid-week, China was threatening “strong countermeasures” if President Trump signed a bill into law that was unanimously passed by the U.S. Senate this week aimed at supporting protestors in Hong Kong while also warning China against a violent suppression of the demonstrations, while Vice Premier Liu He—China’s chief trade negotiator—reportedly invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Beijing for another round of high-level negotiations.
The confusion continued Friday morning with news that Chinese President Xi Jinping had said he wants a trade deal that’s based on “mutual respect and equality,” which Trump responded to by saying he “didn’t like his word ‘equality.’ This can’t be like an even deal.”
But even as these reports have made the limited phase one trade deal promised last month feel unlikely, hedge funds have been gearing up to profit on a possible trade agreement between the two countries.
According to a report from Goldman Sachs (NASDAQ: GS), hedge funds increased their allocations to companies with big portions of their revenues exposed to China in the third quarter.
The firm looked at 833 hedge funds with $2.1 trillion in equity positions and found that at the beginning of the third quarter, the median China-exposed stock had 2.7% of its market cap owned by hedge funds. By the start of the fourth quarter, that position had risen to 3.4%.
The bet on China-exposed stocks has paid off since trade tensions began to ease in mid-August, the firm said. And according to Goldman’s research, stocks with the highest reported sales exposure to China have returned 17% in the past three months, outpacing the S&P 500’s 10% return in the same timeframe.
Stocks with the highest exposure to China include chipmakers like Qorvo (NASDAQ: QRVO), Monolithic Power Systems (NASDAQ: MPWR), Qualcomm (NASDAQ: QCOM), Micron (NASDAQ: MU), Nvidia (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), Intel (NASDAQ: INTC), and Marvell Technology (NASDAQ: MRVL), as well as Casino operators like Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS).
All of these stocks have delivered double-digit returns so far this year, but analysts say two of these stocks in particular could still deliver substantial upside. Analysts’ average price targets for Micron and Wynn Resorts indicate shares could surge another 16.43% and 15.3%, respectively, over the next twelve months.