Citi: For the trade war and equities, it’s not the economy. It’s the earnings

Singapore’s port with the monorail to Sentosa island.Singapore’s port with the monorail to Sentosa island.

Economists may have focused their attention on how badly the U.S. trade war may hurt the global economy, but investors should be watching the earnings impact instead, Steven Wieting, chief investment strategist and chief economist at Citi Private Bank, said Tuesday.

“Economists have generally thought about in terms of economic activity. Let’s just think about US$100 billion in tariffs. If we collect that from American companies, for their inputs, that would equal half a percent of GDP,” Wieting said at a press briefing in Singapore.

“Half a percent of GDP is quite manageable. But it’s fairly close to 10 percent of large-cap corporate profits. That excludes counter measures, excludes any unintended consequences, that excludes the revenue impact of fighting the trade war,” he said.

How badly could that potential earnings hit impact stocks?

“I basically see these trade war concerns being a plus or minus 10 percent issue; truly either direction for global equities,” Wieting said.

On Tuesday, U.S. and China trade negotiators agreed to resume talks ahead of an expected meeting between the two countries’ leaders at the G-20 in Japan later this week.

The Trump administration has said it plans to put tariffs on another US$300 billion of imports from China after a public comment period ends 2 July, Reuters reported.

Wieting pointed to an additional issue for U.S.-listed companies, beyond paying tariffs on their inputs which are imported into the U.S.: Many of them get significant portions of their revenue from China.

U.S.-listed information technology companies receive around 14.3 percent of their revenue from the mainland and energy companies receive around 6.6 percent, Citi said, citing data from Haver Analytics. Overall, S&P 500 companies receive around 5.6 percent of their revenue from China, the data show.

“Basic supply chain issues can be very material for profits,” Wieting said.

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