Apple can weather trade headwinds better than suppliers

Buzz around a new iPhone has revived Apple shares after a four-session swoon, but further trade-related jitters are likely ahead.

Bruised Apple bounces

Buzz around a new iPhone has revived Apple shares after a four-session swoon, but further trade-related jitters are likely ahead.

Apple shares are belatedly leading a global stock market bounce on Tuesday, even as trade disputes reach inflection points, including resumed U.S.-Canada NAFTA talks and broader EU-U.S. discussions, all in the shadow of a possible fresh round of tariffs from Washington. Despite shrugging off deteriorating trade relations for months, the stock’s recent slide suggests investors fear tariffs may soon start to hit home.

Schtum on handset hit ahead of ‘iPhone XS’

Apple’s clearest reversal since July came after the group told U.S. trade officials that a proposed $200bn in new duties on Chinese goods could a hit “wide range” of its products. These include Watch, Mac Mini, accessories like mice, keyboards and chargers, AirPod earphones and Beats headphones, plus internal Mac parts like microprocessors. Curiously, Apple left iPhones off the list, despite handsets accounting for around 60% of $229bn fiscal 2017 revenues compared with ‘just’ $6bn in Watch sales. Indeed, Apple will almost certainly launch new iPhone models on Wednesday at a ‘Special Event’. These are set to include a replacement for the $1,000 iPhone X, underscoring the group’s confidence there will be no let-up in demand for luxury-priced handsets. Buzz ahead of the event, coinciding with a smattering of positive brokerage comment, have helped stem the share’s slide, but investors could become restive again afterwards.

Trillion-dollar chain

The group has after all so far declined to quantify possible financial impact if trade disputes hurt its extensive supply chains in Mainland and Greater China, much less any hit to sales. U.S. President Donald Trump suggested earlier this week Apple should build products entirely in the States to avoid tariffs. But recent and best-corroborated manufacturing relationships show it has used component contractors spread over 11 countries in 2018 to date and during 2017. Active partnerships with such firms could easily be three times higher, but those in our limited view alone number around 40, with a total market value of $1.4 trillion. As things stand then, it would be impossible for Apple to uproot key Chinese manufacturing and re-establish it in the States. Pointless too.

Apple landing set to be soft

That said, few investors expect $1.05 trillion-dollar Apple to come off worst, however the trade conflicts pan out. Net cash of $243.7bn at the end of the July quarter, service revenues growing in double-digit percentages, and resilient iPhone demand will almost certainly shelter Apple’s profitability for the long term. It’s Apple’s vast manufacturing base that could add further sustained weight to global markets. Particularly as signs of a cyclical downturn in semiconductors and the wider components industry build. Investors are likely to keep selling Apple suppliers with broad brush strokes in lieu of further clarity, keeping a shadow over shares of electronic parts makers in months to come.

Thoughts on Apple’s share price chart

Apple stock can’t escape turbulence entirely, but it’s a matter of degree. The wide-angle view of its daily chart below shows the essential rising trend since end June 2016 is intact. Indeed, since the stock’s early-May earnings announcement and pledge to pay out a further $100bn in buybacks, the shares have hugged a rising line with a slightly steeper gradient, protected by a former resistance at $194.85 where support can be expected. Granted, with a $224 price at the time of writing, the shares look vulnerable back to $210 at least in the event of determined selling. But orderly progress over the year has built solid structures. These should reduce probability of declines with  enough traction to sustainably damage Apple’s solid uptrend.

Figure 1 - Technical analysis chart: Apple Inc. – daily intervals

Source: Thomson Reuters and City Index


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