China's President Xi Jinping announced to further open up its markets to foreign investors. In my view, this is a clear attempt to end the trade war dynamic which has been developing between the U.S. and China. There are 3 reasons I view this as a clear positive development for investors: the trade war rhetoric is likely to cool off, it is a highly positive development for U.S. and European high-tech market leaders, and the speech indicates an understanding of the role of free capital markets to optimize allocation decisions.
Without wanting to repeat news (read it here), there are a few key promises made:
- To protect foreign IP rights
- To open up limits on foreign investments into banks, securities, and insurance companies
- To combat monopolies
Secretary of Commerce Wilbur Ross has previously indicated an important aim of the tariffs is to influence China to stop stealing U.S. intellectual property rights. With this speech, Xi Jinping looks like China is ceding that wish. In my view, the rhetoric will go down a notch. It could rekindle if China takes too long implementing actual policies.
The news is especially favorable for companies with strong global market share (except in China) which they derive from strong intellectual property. If this intellectual property is now respected in China, it becomes a more level playing field. To me, this seems one of the most actionable takeaways from Xi Jinping's announcements.
Although the headlines are about autos who will have tariffs decreased, I believe firms like listed below will ultimately derive much greater benefits. I filtered companies for global business, determined subjectively whether they derived a strong competitive advantage from intellectual property, and disqualified firms I believe overvalued:
- Apple (NASDAQ:AAPL)
I'm not worried about Apple's lost revenue from iBooks or iTunes movie service for a second. I'm worried about the PRC consistently undermining Apple's competitive position.
The new policies would significantly alleviate those concerns.
It remains to be seen whether the government starts meddling even more in Apple's business, but just the threat of it means I don't like to see significant Apple investments into the country.
- General Electric (NYSE:GE)
Industrials are extremely vulnerable to IP-theft especially if forced to joint venture. General Electric aims to be a market leader and 85% of its earnings are tied to markets where it has a leading market share. The PRC has been known to purposely slow down foreign firms when capturing high market share. It remains to be seen how things play out, but General Electric should be a large beneficiary over time.
- Allergan (NYSE:AGN)
Allergan is just an example of an attractively valued pharmaceutical company with global products. It is actually fast growing in China, and it is very good news if that's no longer frowned upon and Allergan's IP will be secure. If not, it is very hard to retain pricing power over the intermediate to longer term.
- Franklin Resources (NYSE:BEN)
Franklin Resources doesn't just offer many emerging market funds, but it also markets its funds in Greater China. Xi Jinping specifically called out the asset management industry as being allowed a more free reign. Franklin has already established a base and can more aggressively start building its brand.
- Fanuc (OTCPK:FANUY)
On a global basis, Fanuc has a dominating market share in CNC systems and industrial robots. China is a huge player in the global manufacturing industry. If Fanuc is allowed a more free reign and its proprietary technology becomes better protected, that's a huge pro for this company.
- Bayer AG (OTCPK:BAYZF)
Especially after the Monsanto (MON) tie-up is completed, Bayer will be the dominant player in the seed business. China is a major market and the seed business is heavily reliant on intellectual property being respected.
- Blackstone Group (NYSE:BX)
CEO Steven Schwarzman sponsors U.S. students going to study in China. Blackstone has an important presence in China and Schwarzman advised the PRC with respect to its capital markets and controls. This news should allow Blackstone to grow in China very quickly.
- Procter & Gamble (NYSE:PG)
Procter & Gamble sells products that are a bit on the expensive side in emerging markets. However, the middle class is growing rapidly in China. Procter & Gamble tends to spend quite a bit on R&D to innovate on products and packaging. The firm also invests to build brands. It's very reliant on IP in order to capture its margins.
- Microsoft Corp. (NASDAQ:MSFT)
Microsoft Corp. is completely reliant on IP rights to charge for its products. China is a huge market for them, and if Xi is serious, this could spur some serious growth.
- Amazon (NASDAQ:AMZN)
Amazon doesn't rely on IP as much as most other companies on this list. I've specifically included Amazon because of Xi's statements about competition. Currently, Alibaba (BABA) is a huge player in China. Having Amazon really step it up and allowing the firm to compete on even terms would certainly introduce major competition. Ultimately to the benefit of the Chinese consumer.
- Unilever PLC (NYSE:UL)
With Unilever, the story is exactly the same as for Procter & Gamble. Products are expensive in emerging markets. Chinese middle class is growing rapidly. Unilever spends quite a bit on R&D to innovate and invests to build brands. It's very reliant on IP in order to be able to charge its higher prices.
- Deere & Co. (NYSE:DE)
Deere's business model is highly dependent on gaining large local market shares. It also benefits from being able to collect data and charging for its more advanced technology compared to smaller competitors. If its IP is better protected, that should help it to sustain its competitive advantage longer.
Finally, Xi expressed an understanding of how important functioning and free capital markets to allocate resources efficiently. China could well be a lot more serious about the above-mentioned reforms, as compared to in the past, because it is dealing with "slowish" domestic growth. This incentivizes China to entice foreign capital in order to stave off a domestic debt crisis.
Disclosure: I am/we are long AGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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