Apple and Tesla may no longer be ‘safe investments’ as China’s troubles grow

In a note to clients, Mike O’Rourke, chief technical strategist at JonesTrading, observes how Magnificent Seven stocks have been under pressure to shore up the S&P 500
SPX
in a bumpy 2024.

“Key leaders Apple and Tesla continue to be bombarded by daily negative headlines regarding their fundamental businesses. While it barely draws much attention, it does not help that they are also the two most China exposed companies,” says the strategist.

Apple and Tesla have lost 4% and 11% respectively this year, the worst performers of the seven.

So is China the common denominator for the pair’s woes?

Apple recently cut handset prices in the China where it battles competitors like Huawei. Tesla also reduced EV prices in the country where Berkshire Hathaway-owned BYD
002594,
-4.35%
rules. Wednesday brought news of Tesla price cuts in Germany, where it faces production disruptions due to Red Sea ship attacks.

Jenny Hardy, portfolio manager on the GP Bullhound Global Technology Fund, tells MarketWatch that for Apple and Tesla, “it’s much more about the competitive environment that could hurt them rather than their underlying markets.” She notes that in a gloomy China market, EVs and smartphones were strong into end 2023.

Hardy notes a number of new launches in China have been competing with Tesla at the higher end, such as Huawei’s luxury Aito M9 model, rumored to have hit weekly sales of more than 20,000. “At the very least for Tesla it means the aggressive price war it is facing in China continues,” she says.

And Huawai has also been taking “significant share” where Apple is concerned. That company had a 16% smartphone share in China that fell to around 2% by 2022 after the U.S. blacklist, she notes.

“For us in the portfolio, we continue to be exposed to China EV through the semiconductor component companies who supply into the Chinese market (Infineon
IFX,
-2.17%
and NXP
NXPI,
-0.06%
) – who are less vulnerable to pricing pressure than the OEMs. We remain cautious around broader consumer electronics exposure, where the Chinese demand recovery remains uncertain,” she says.

More food for thought comes from Peter Navarro, former White House trade adviser under President Donald Trump, whose recent op/ed — “The eve of Apple and Tesla’s destruction in China” — has been making the rounds. Navarro, it should be noted, is due to be sentenced later this month after being found guilty of contempt of Congress for not cooperating with a probe into the U.S. Capitol attack two year ago.

“Like GE before it, Apple and Tesla now have this grim mercantilist reality. Because Mr. Cook and Mr. Musk each directed the offshoring of the vast bulk of Apple’s and Tesla’s production to China , the companies are at the mercy of a merciless dictator in Xi Jinping,” he writes.

“Arrogance and hubris are common threads that run from Mr. Immelt  [Jeffrey, former CEO] in the 2000s through Mr. Cook and Mr. Musk today,” said Navarro, adding that the companies’ products face a “xenophobic ban” in the country.

The food-for-thought kicker from Navarro? “Whether you are a big hedge-fund manager or a small retail investor, you have to wonder whether Apple or Tesla are still safe investments — at least on the long side, if you get my drift.”  

The markets

Stock futures
ES00,
-0.40%

YM00,
-0.41%
are weak, led by tech
NQ00,
-0.44%,
with Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
mixed. Oil prices are down 2%, on China growth disappointment, which knocked 3.7% off the Hang Seng
HK:HSI.

The buzz

Charles Schwab
SCHW,
-1.41%,
Citizens Financial
CFG,
-1.39%
and U.S. Bancorp
USB,
-1.83%
will report ahead of the open.

China’s economy grew 5.2% in 2023, but data showed an uneven recovery and some analysts were looking for growth of 5.3%.

Due at 8:30 a.m. along with import prices, retail sales seen rising to 0.4% in December from 0.3%. Industrial production hits at 9:15 a.m. and a home builders confidence index at 10 a.m.

Fed Vice Chair for Supervision Michael Barr and Fed Gov. Michelle Bowman will both speak at 9 a.m. The Fed’s Beige Book of economic conditions is due at 2 p.m.

Read: Government shutdown: Congress has four days to act. Here’s what’s at risk.

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The chart

The rocky start to 2024 is a sign the “easy money” has been made and to expect a challenging year, says Tom Lee, head of Fundstrat.

“But the reason we see the ‘easy money’ made is we are now overbought. So, even with new highs likely at the end of January, this is not a full ‘risk-on’ market,” says Lee, who adds the bulk of gains will be seen in the second half.

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