SUPERNEWS

Macro

Tech Exposure to China Risks Gains; SMH ETF Down 7%

Tech companies' reliance on China poses risks amid economic instability and regulatory challenges, with significant sales exposure and recent underperformance.

By Barry Stearns

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4/24, 12:18 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Apple Inc.
Advanced Micro Devices, Inc.
Intel Corporation
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Key Takeaway

  • Tech stocks' heavy exposure to China poses risks amid the country's economic slump and push for domestic buying, per Piper Sandler.
  • Semiconductor companies, generating over 30% of sales in China, face vulnerability; VanEck Semiconductor ETF (SMH) dropped about 7% in April.
  • S&P large caps' near-record reliance on China could be threatened by regulatory pressures and potential bond defaults.

Tech Stocks Face China Challenge

Tech companies, particularly those in the semiconductor industry, are facing significant exposure to the Chinese market, with more than 30% of their sales generated in the country. This reliance comes at a time when China is experiencing economic instability, particularly in its real estate sector, and is pushing for greater domestic consumption over foreign products. Piper Sandler's chief global economist, Nancy Lazar, highlighted the vulnerability of tech stocks due to these conditions, noting the near-record reliance of S&P 500 large-cap companies on sales in China. The recent directive from China to its largest telecommunications carriers to stop using foreign chips underscores the risks tech companies face.

Semiconductor ETF and Tech Giants Underperform

The VanEck Semiconductor ETF (SMH) has seen a notable decline of about 7% in April, underperforming the S&P 500's more than 3% drop during the same period. Major tech companies like Advanced Micro Devices and Intel have experienced significant losses, with their shares plunging more than 15% and 21%, respectively, this month. These movements reflect the broader concerns over tech companies' heavy exposure to the Chinese market and the potential impact of China's economic policies and regulatory environment on their performance.

Apple's Sales Slump in China

Apple, one of the largest tech companies with significant exposure to China, has reported a 19% drop in iPhone sales in the country during the March quarter, marking its worst quarter since 2020. This decline comes amid Beijing's escalated ban on foreign devices in state-backed firms and government agencies, further complicating Apple's business operations in one of its biggest markets. The slump in iPhone sales in China is indicative of the broader challenges that tech companies face in the country, as they navigate an increasingly difficult regulatory and economic landscape.

Street Views

  • Nancy Lazar, Piper Sandler (Bearish on Tech stocks with exposure to China):

    "Tech stocks are heavily exposed to China, which could put gains at risk... Tech companies are especially vulnerable to any weakness in China, with semiconductor businesses notably generating more than 30% of their sales in the country."