Goldman Warns of Declines for U.S. Stocks With High China Sales

(Bloomberg) -- U.S. stocks with high levels of sales in China have been on a tear in the recent rally -- but that may be about to change because of renewed geopolitical tensions, according to Goldman Sachs Group Inc.

A basket of companies with high China exposure has outperformed the S&P 500 by about 15 percentage points since mid-March, suggesting investor attention has been more on China’s economic recovery than the tensions between the two world powers, strategists led by David Kostin wrote in a note Wednesday. But they expect those tensions to return to the fore in the next few months.

“U.S. stocks with high China sales exposure have outperformed as equity investors have focused more on the growth outlook than the political environment,” the strategists said. “However, these companies face downside risks as the U.S. presidential election nears.”

The trend highlighted by Goldman is a global one. MSCI’s gauge of global developed market stocks with significant China sales exposure has climbed 46% since March 18. The MSCI World Index is up 32% over the same period.

On Wednesday, President Donald Trump signed a measure punishing Chinese officials for imprisoning more than one million Muslims, which Beijing subsequently threatened to retaliate to. That continued a pattern of escalation from the U.S. criticizing China for trying to pass national-security legislation that would curb freedoms in Hong Kong, and Trump blaming China for the spread of coronavirus.

“Potential legislation related to the U.S.-China relationship, such as investment restrictions, technological ‘decoupling’ and tariffs, represents a key downside risk,” the Goldman team wrote. “Our political strategists expect that Chinese policymakers would also generally react to any further U.S. actions.”

©2020 Bloomberg L.P.