Huawei Reprieve Is Good and Bad News for Asia Tech Stocks

(Bloomberg) -- Stock markets in Asia surged in a relief rally Monday after the world's largest economies declared a truce in their trade war. The sector that just won the biggest reprieve is tech stocks.

President Donald Trump's decision to allow U.S. corporations to resume sales to Huawei Technologies Co., China's largest telecommunications-equipment maker, and plans to hold off imposing an additional $300 billion in tariffs made tech stocks the best performers in Asia Monday. The MSCI Asia Pacific Infotech Index soared as much as 2%, while the regional benchmark climbed 0.9%.

Trump and Xi Call Time (For Now) on Trade War: Balance of Power

Shares of chipmakers -- among the biggest contributors to the MSCI Asia Pacific Index -- have been embroiled in the U.S. and China trade conflict for more than a year. Trump's move to cut off supplies to Huawei in May added to the sector's wall of worry. Volatility has soared by about 300% since its low just before the trade spat escalated.

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“The lifting of a ban on the sale of technology to Chinese companies was a step beyond expectations and the market reaction come Monday will likely be positive,” said Kerry Craig, global market strategist at JPMorgan Asset Management, by email.

Samsung Electronics Co. -- the world's biggest chipmaker -- erased early gains and fell 0.9% after Japan said the exporters of chip materials to South Korea will have to apply for individual approvals from July 4, citing a worsening bilateral trust relationship. SK Hynix Inc., a supplier to both Huawei and U.S. companies, stayed buoyant.

On the flipside, Huawei's limited supply of imported chips that had helped boost China's domestic producers amid Trump's blacklist may be negatively impacted. Watch Unigroup Guoxin, Ingenic Semiconductor, Wuhan P&S Information Technology, Hangzhou Silan Microelectronics and Konfoong Material.

“The most fragile part of the tech sector in our view remains semiconductor names, due to the uncertainty surrounding Huawei and the entity list combined with persistent price decline in memory chips,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA.

PC, Phone Suppliers

Trump's decision to hold off on an additional levies will be good for suppliers of personal computers and smartphones.

“We expect the market to react positively as the next batch of tariffs impacting PCs and smartphones now will not be imposed,” Citigroup analyst Arthur Lai said in a June 30 report. Lai pointed to companies that are “fast and flexible enough to adapt to operating environment changes” like Taiwan's Delta Electronics, Micro-Star International, Inventec and Wistron.

Here are some other sectors to watch:

China Stocks

China investors can finally turn their focus elsewhere after the Trump-Xi meeting showed some progress on trade. Fund managers weren't expecting much as the two leaders met Saturday at the Group of 20 summit in Japan. An agreement to resume negotiations will be welcomed by investors.

Chinese video surveillance giants could rally -- Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co. -- after the U.S. and China agreed to resume negotiations. In May, the U.S. administration considered barring both companies from purchasing U.S. technology.

The DMZ Meet

Trump's brief crossing of the North Korean border in the Demilitarized Zone and an agreement to restart stalled nuclear talks in a historic meeting with Kim Jong Un may also move defense-related stocks:

• South Korea's so-called ‘‘peace stocks'': Hyundai Rotem rose 5.9%, Hyundai Elevator climbed 8.5%, Namhae Chemical gained 3.7%, Hyundai Engineering climbed 2.6%, HDC Hyundai Development advanced 0.6%
• Japan: Ishikawa Seisakusho, Howa Machinery, Hosoya Pyro-Engineering, Mitsubishi Heavy Industries

Japan

Watch auto stocks as Japan and the U.S. agreed to speed up trade talks after Trump threatened to raise auto tariffs on Tokyo. The U.S. is Japan's largest export market after China and its biggest car customer. Companies to keep an eye on include: Toyota Motor, Honda Motor, Nissan Motor, Isuzu, Hino and Subaru.

As disputes over wording on climate change and trade became a focus at the G-20, a Japanese stock that could bear the brunt of any issues on this front is Hitachi Zosen. There are more than 370 waste-to-power plants operating in Japan, according to the environment ministry's Kurisu. Japanese companies including Hitachi are producing and exporting the facilities.

South Korea

President Moon Jae-in's meeting with Trump on Sunday could also give Korea's stocks a jolt Monday:

• Auto stocks and their suppliers: Kia Motors, Hyundai Motor, SL Corp., Hyundai Wia, Mando Corp and Hankook Tire
• Korean steel: Posco

Southeast Asia

Vietnam's recent fame as a big winner of the U.S.-China trade war, putting itself in Trump's crosshairs, may lead to some moves in the nation's stock market: Kinh Bac City, Gemadept, Thanh Cong Textile, Vietnam National Textile & Garment Group, FPT Corp., Mobile World.

Skepticism

With no real trade deal in place, some aren't convinced the relief rally expected on Monday will last.

“The reprieve may be short-lived and there is still no guarantee that a deal can be reached or even that any deal would completely address all of the differences that have driven investor anxieties, particularly when it comes to technology and the enforcement of a possible deal,” JPMorgan's Craig said.

--With assistance from Naoto Hosoda, Kurt Schussler, Min Jeong Lee, Nguyen Kieu Giang and Cormac Mullen.

To contact Bloomberg News staff for this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net;Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net;Amanda Wang in Shanghai at twang234@bloomberg.net;Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Joanna Ossinger

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With assistance from Bloomberg