Who Stands to Benefit from the Likely China Pick-Up?

U24

U24 U24

U24 U24 Who Stands To Benefit From The Likely China Pick-Up?

Our focus today: We look at G20 nations’ trade links, and corporate exposure to China. U24

Why it matters: With China and its G20 trade partners accounting for roughly 85% of Global GDP, the expected China pick-up will have a big impact on the Global economy. Some EM markets and DM companies are already rallying in anticipationU24 . U24

Our conclusions:

1. China’s growing Global import dominance helps explain why its economic momentum drives Global activity and markets. A China pick-up would be good news for Global growth. 2. If China’s recent stimulus helps boost growth -- as we expect -- countries with high export exposure to China (or its supply chain) will benefit. 3. Major DM markets (e.g., Japan, Germany, the U.S.) would benefit, given their companies’ sizable exposure to China and its supply chain (e.g., Singapore, Taiwan, Korea).

U24

Copyright 2019 Cornerstone Macro. All rights reserved. This report is prepared exclusively for the use of Cornerstone Macro institutional clients and may not be redistributed, retransmitted or disclosed, in whole or part, or in any form or manner, without the express written consent of Cornerstone Macro.

CornerstoneMacro.comThis Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

U24 China’s Import Appetite Has Grown, Increasingly Driving Global Trade And Growth. U24 U24 China is the 2nd largest importer of Global Global Real Exports (CPB) goods, taking in 11%. Its share has roughly 3 Mo. Avg. Y/Y% Nov: 2.8% 6.0 tripled since joining WTO in 2001. (R-Solid) In 2016, China’s eco reacceleration 53 U24 5.0 U24 helped lift Global growth in general, and 4.0 exports in particular. ?? 52 3.0 The 2018 Global slowdown (including U24 exports) was largely driven by China’s 2.0 weakening economic activity. To the extent China growth picks up this year, as we 51 1.0 expect, an upward reversal in Global exports China U24 U24 is increasingly likely. There’s a 74% 74% Correlation Composite PMI (CSM) 0.0 3 Mo. Avg. Jan: 51.7% correlation between CSM’s China Composite (L-Dotted) 50 -1.0 PMI and Global exports growth. 11 12 13 14 15 16 17 18 19 20 FYI: (U.S. is still the largest importer, but its share has declined over time).

% Global Goods Imports (IMF) 2018 e 20 18 U.S. 16 13.0% % Global Goods Imports (IMF) 14 Latest 1. U.S. 13.0% 12 2. U24China 11.0% 3. Germany 6.6% 10 4. Japan 3.8% China 5. U.K. 3.6% 8 6. France 3.5%

China Enters WTO Enters China 11.0% 6 7. Hong Kong 3.3% 8. Netherlands 3.2% 4 9. Korea 2.7% 10. Canada 2.6% 2 11. Italy 2.6% 12. Mexico 2.5% 0 13. India 2.5% 80 85 90 95 00 05 10 15 20

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

U24 Beijing’s Massive Stimulus Will Likely Lift Chinese And Global Economic Activity.

U24 U24 China Fiscal Stimulus % GDP 2019: 3.0% e As the world’s 2nd largest economy, 3.5 Tax Spending China increasingly drives Global trade 3.0 (see prior page). Shifts in Beijing’s 2.5 U24 U24 monetary and fiscal policies (and in 2.0 turn, China’s growth), now have 1.5 significant Global eco/market 1.0 repercussions. There’sU24 a 77% 0.5 correlation between the Global ex 0.0 14 15 16 17 18 19 20 China Composite PMI, and China’s -0.5 U24 China Composite PMI Model (CSM*) Composite PMI, with U24China leading by 3 Mo. Avg. 53.0 2 months.

52.5 Forecast After stepping on the brakes in Jun: 2017, Beijing embarked on a massive 52.0 51.8% stimulus program in mid-2018, which 51.5 Jan: 51.7% will likely lift* China’s eco activity in 51.0 1H of 2019. And that strength will, in

50.5 turn, support China’s trading partners. Model Using Real TW Yuan AAA Spread, and High Yield Spread 50.0 EMs -- particularly those in China’s 14 15 16 17 18 19 20 supply chain, and commodity Global ex China Composite PMI 3 Mo. Avg. Jan: 53.2% producers -- are likely to be the biggest 53.0 (R-Solid) 55.0 77% Correlation winners. Many Eurozone,U24 Japanese 54.5 and U.S. companies are also tied to 52.5 54.0 China, so they’ll also see a lift. 53.5 52.0 ?? 53.0 52.5 51.5 52.0 *FYI: Yes, even after accounting for China Composite PMI 51.0 3 Mo. Avg. Jan: 51.7% 51.5 their deleveraging campaign, which Advanced 2 Mos (L-Dotted) 51.0 Beijing is dialing back now. We wrote 50.5 50.5 about this last week. 14 15 16 17 18 19 20

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

U24 Does China’s Reflation Help Explain The Bounces In The GSCI and MSCI?

U24 U24 China Composite PMI Model (CSM*) 3 Mo. Avg. 53.0 While China’s economy

52.5 Forecast is widely viewed as very Jun: U24 51.8% weak, their composite U24 52.0 PMI may be bottoming, in 51.5 Jan: 51.7% line with our model. 51.0 Note: U24commodity 50.5 Model Using Real TW Yuan prices and world stocks AAA Spread, and High Yield Spread 50.0 seem to be sending a 14 15 16 17 18 19 20

similarU24 story. U24 GS Commodity Index Feb 8: 407.9 700 650 600 550 500 450 +11% 400 from 350 low 300 250 14 15 16 17 18 19 20

MSCI All World Feb 8 570.0 650 U24

600 +12% from 550 low

500

450

400 14 15 16 17 18 19 20

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

U24 A Rising Tide In China Would Lift Both EM And DM Companies.

U24 U24

Exposure To China Judging by their export exposure, China’s Pac Rim trading U24 U24 partners stand to benefit most Exports Revenues Stock Index from Beijing’s policy-induced Country % GDP % Index or Basket pick-up. And in most cases, their stock markets’ China exposure Taiwan 16.0 18.0 TAIEX U24 parallels their exports exposure, Singapore 16.6 14.0 FactSet* e.g. Taiwan, Singapore, and Japan 2.7 9.2 NIKKEI Korea. These countries are in

Korea 9.2 8.8 KOSPI U24 China’s supplyU24chain and/or have Australia 5.8 7.1 FactSet financial linkages (see IMF, 2016, page 50). Germany 3.8 6.2 DAX Interestingly, most major U.S. 0.7 5.5 S&P 500 DM stock markets are U.K 0.8 5.0 FactSet* disproportionately overexposed Brazil 2.3 4.7 IBOV to China, relative to their direct EU 1.3 4.0 STOXX trade exposure, e.g. Japan, Germany, and the U.S. Malaysia 9.3 3.0 FactSet* For example, Japan’s exports to Philipines 2.2 2.9 PSEI China are less than 3% of Japan’s Russia 2.5 2.4 RTS GDP, but China-related revenues in the Nikkei are over 9%. India 0.5 2.1 BSE Thailand 6.5 1.9 SET A few DMU24 stock indices have a high correlation with China’s Indonesia 2.3 1.8 SE Comp PMIs (see the Nikkei and the DAX Canada 1.1 1.7 FactSet* on page 9). S Africa 2.5 1.2 FactSet* Chile 6.9 0.8 FactSet*

This list includes countries we track on a *FactSet regular basis, roughly 70% of World GDP Country (FYI: with China, roughly 85%) Basket

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

U24 Globally, China-Linked Companies May Benefit From China’s Pick-Up … See The List

U24 U24 We partnered with CSM’s Strategy Team to find Global companies with high exposure to China: “Global Equities With Sales >25% To China.” The full list has 75 names (25 shown below). Please let us know if you would like to see them all.

U24 U24 This list -- extracted from MSCI’s All World basket -- is heavily-weighted toward U.S. companies (perhaps not surprising, given their overwhelming presence in the Global stocks universe).

That said, this basket of “Global Equities With Sales >25%” is outperformingU24 the MSCI World. Are they sniffing out the China reflation story early? We will be watching this index closely.

GlobalU24 Equities With Sales U24> 25% To China China Composite PMI Model (CSM*) 3 Mo. Avg. % Sales To Symbol Company Name Country 53.0 China 52.8 1. YUMC Yum China Holdings, Inc. 100 United States 52.6 2. SINA SINA Corp. 99 United States 52.4 3. 628784 Chunghwa Telecom Co., Ltd 88 Taiwan 52.2 Forecast 4. 608625 Fortescue Metals Group Ltd 88 Australia Jun: 5. CRUS Cirrus Logic, Inc. 82 United States 52.0 Jan: 51.8% 51.7% 51.8 6. MXL MaxLinear inc 69 United States 7. QCOM QUALCOMM Incorporated 65 United States 51.6 8. B01VZN LG Display Co., Ltd 63 South Korea 51.4 Model Using Real TW Yuan 9. 618027 Dairy Farm International Holdings Ltd 58 Singapore 51.2 AAA Spread, and High Yield Spread 10. MU Micron Technology, Inc. 57 United States 51.0 Global Equities With Sales > 25% To China 11. DIOD Diodes Incorporated 54 United States Feb 18 May 18 Aug 18 Nov 18 Feb 19 May 19 rel to MSCI World Index 12. MPWR Monolithic Power Systems, Inc. 53 United States 107.7 13. 6981 Murata Manufacturing Co., Ltd. 51 Japan 14. 6762 TDK Corporation 51 Japan U24 15. POWI Power Integrations, Inc. 51 United States 102.7 16. 614469 BHP Group Ltd 51 Australia 17. BH0P3Z BHP Group Plc 51 United Kingdom 18. QRVO Qorvo, Inc. 50 United States 97.7 19. B17KC6 Wilmar International Limited 49 Singapore 20. MRVL Marvell Technology Group Ltd. 49 United States 21. AVGO Broadcom Inc. 48 United States 92.7 Chart courtesy: 22. BDVLJ7 ORION CORP. 48 South Korea CSM Strategy 23. SYNA Synaptics Incorporated 48 United States 24. CEVA CEVA, Inc. 45 United States 87.7 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 25. 6753 Sharp Corporation 45 Japan . .

75. LFUS Littelfuse, Inc. 25 United States

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

Foreign Profits Of U.S. Companies (And S&P EPS) Will Benefit From China’s Pick-Up … Later This Year.

China Composite PMI Model (CSM*) 3 Mo. Avg. In a recent report on S&P EPS, 53.0 U24 Aneta highlighted that U.S. corporations’ foreign profits will likely 52.5 Forecast Jun: weaken in 1H due to the lagged effects 51.8% 52.0 U24 of last year’s dollar strength, and the

51.5 Jan: China/Global slowdown. However, by 51.7% 2H, we expect those drags to abate. 51.0 The follow-through from a China 50.5 Model Using Real TW Yuan pick-up this year should help lift AAA Spread, and High Yield Spread 50.0 overall S&P 500 EPS in 2H of 2019.

14 15U.S. Foreign16 Corporate17 18 Profits19 20 U24 (Also, the dollar’s recent weakness will B.T. Adj IVA & CCA Y/Y% 2018:3Q: 6.7% help foreign profits, and S&P EPS.) U24 16 U24 Soft data (and markets) will likely 12 discount that improvement even

8 sooner. Indeed, some markets are

starting to reflect that. U24 4 U24

U24 0

-4 2019:2Q -5% y/y e U24 S&P 500 Foreign Sales -8 S&P 500 Operating EPS High to Low Rel Performance 14 15 16 17 18 19 20 Y/Y% 2018:4Q: 20.0% e Jan 25: 100.9 115 30 Model: 2019:4Q: 110 20 9.8 % e 105 10 100

0 95 R2 = 64% Unit Labor Costs, change in the statutory -10 corporate tax rate, CSM Eco measure of net policy 90 impulse, the yield curve, BAA spreads, trade- weighted dollar, and the Global PMI. -20 85 14 15 16 17 18 19 20 14 15 16 17 18 19 20

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

In The S&P 500 Universe, Who Gains The Most From A China Bounce?

China Mfg PMI Model (CSM) 3 Mo. Avg. 52.0 U24 China-exposed U.S. industrial *Avg. of Caixin & CLFP and tech shares have already 51.5 started to outperform, perhaps U24 Forecast anticipating a China pickup. Jun: 50.8% 51.0 If you would like to see the companies in these China sales 50.5 indices, please let us know. 50.0

49.5 U24 Jan: 49.5% Using SHIBOR, ICBC CDS, 49.0 U24

U24and Real TW Yuan 48.5 14 15 16 17 18 19 20

S&P 500 China Sales U24 High to LowU24 2015 = 1.00 Jan 25 1.25 Most-exposed industrial U24 Industrials corporations include: A.O. 1.23 Smith (AOS), Expeditors 1.15 (EXPD), Boeing (BA), and U24 TransDigm (TDG). 1.05

0.95 Tech Most-exposed IT corporations include: Skyworks (SWKS), 0.85 0.84 Qualcomm (QCOM), Micron (MU), Broadcom (AVGO), and 0.75 Qorvo (QRVO).

0.65 14 15 16 17 18 19 20 The chart above compares the performance of the top 20% stocks in terms of China sales exposure (% of revenue) to the bottom 20%. Eq. weighted.

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

Stronger China Should Support Japan And Germany Stocks.

9% of Nikkei and 6% of DAX companies’ revenues come from China, helping explain why swings in China’s mfg PMI correlate nicely with the Nikkei and the DAX. So, if China’s economy improves, as we expect, then these indices should enjoy support. U24

U24 China Mfg PMI Model (CSM) 3 Mo. Avg. 52.0

51.5 Forecast 51.0 Jun: 50.8%

50.5

50.0 U24

49.5 U24 Jan: 49.5% Using SHIBOR, ICBC CDS, 49.0 U24 and Real TW Yuan 48.5 14 15 16 Nikkei17 18 19 20 DAX Feb 11: 20333 Feb 11: 11008.0

25000 14000 U24 U24

23000 13000 U24 ?? ?? 21000 12000

U24 19000 11000

17000 10000

15000 9000

13000 8000 14 15 16 17 18 19 20 14 15 16 17 18 19 20

Correlation Nikkei With CSM’s China Mfg PMI Composite: Correlation Dax With CSM’s China Mfg PMI Composite: 50% with China leading by 2 qtrs. 60% with China leading by 2 qtrs.

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

Stronger China Should Help Japan And Germany.

China is the destination for 19% of Japan’s exports, and 7% of Germany’s. So, a policy- driven pick-up in China’s growth, particularly in mfg, should help boost their growth.

China Mfg PMI Model (CSM) U24 China Mfg PMI Model (CSM) 3 Mo. Avg. 3 Mo. Avg. 52.0 52.0

51.5 51.5 U24Forecast Forecast 51.0 Jun: 50.8% 51.0 Jun: 50.8%

50.5 50.5

50.0 50.0

49.5 49.5 Jan: 49.5% Jan: 49.5% 49.0 Using SHIBOR, ICBC CDS, 49.0 Using SHIBOR, ICBC CDS, and Real TW Yuan and Real TW Yuan U24 48.5 48.5 Japan Goods Exports to China + Pac Rim* 14 15 16 17 18 19 20 14 Germany15 Goods16 Exports17 to China18 + Pac19 Rim* 20 3 Mo. Avg. Y/Y% Dec: -0.6% U24 3 Mo. Avg. Y/Y% Nov: 6.2% 20 U24 16

15 12 ?? 10 8 U24 5 U24 ?? 4 U24 0 0 -5

-10 -4 U24

*Ind, Kor, Tai, Indo, Mal, Sing, Thai, HK *Ind, Kor, Tai, Indo, Mal, Sing, Thai, HK -15 -8 14 15 16 17 18 19 20 14 15 16 17 18 19 20

Japan’s Top Ten Product Exports: Germany’s Top Ten Product Exports: 1. Vehicles: US$146.2 billion (20.9% of total exports) 1. Vehicles: US$257.2b (17.8% of total) 2. Machinery including computers: $138.4 billion (19.8%) 2. Machinery including computers: $245.4b (17.0%) 3. Electrical machinery, equipment: $105.6 billion (15.1%) 3. Electrical machinery, equipment: $148.8b (10.3%) 4. Optical, technical, medical apparatus: $39.8 billion (5.7%) 4. Pharmaceuticals: $84.1b (5.8%) 5. Iron, steel: $28 billion (4%) 5. Optical, technical, medical apparatus: $72.8b (5%) 6. Plastics, plastic articles: $25.1 billion (3.6%) 6. Plastics, plastic articles: $63.6b (4.4%) 7. Organic chemicals: $17.9 billion (2.6%) 7. Aircraft, spacecraft: $41.8b (2.9%) 8. Gems, precious metals: $15.2 billion (2.2%) 8. Articles of iron or steel: $30.5b (2.1%) 9. Ships, boats: $12.3 billion (1.8%) 9. Mineral fuels including oil: $26.8b (1.9%) 10. Mineral fuels including oil: $11.4 billion (1.6%) 10. Iron, steel: $26.4b (1.8%) Source: Worldstopexports.com Source: Worldstopexports.com

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

Countries In China’s Supply Chain Appear To Be The Natural Winners From China’s Pick-Up.

China Composite PMI Model (CSM*) 3 Mo. Avg. 53.0 By definition, supply-chain U24 nation exports to China should 52.5 Forecast Jun: have a strong correlation with 52.0 51.8% U24 swings in China’s growth. And they 51.5 Jan: 51.7% do: those exports have a 75%

51.0 correlation with China’s composite PMI (a proxy for overall economic 50.5 Model Using Real TW Yuan activity). So, near term, these AAA Spread, and High Yield Spread 50.0 countries stand to benefit from 14 15China 16Nominal17 Goods 18Imports 19 20 3 Mo. Avg. Y/Y% Dec: 10.6% U24 China’s reflation.

30 U24 In total, China plus these U24 supply-chain Asian EMs are 20% of 20 ?? Global GDP. So, a pick-up among 10 them would be a support for U24 U24 Global growth. 0 U24

-10

U24 -20 Supply Chain Nominal Goods Exports To China % World GDP* 14 Korea,15 Taiwan,16 Malaysia,17 Singapore18 GDP Wts.19 20 Y/Y% 2018:4Q: 1.8% China 15.9% 20 Exports to China % Exporters’ GDP Korea 1.6% 15 Singapore 17% Taiwan 1.0% Taiwan 16% 10 Korea 9% Malaysia 0.7% 20% Malaysia 9% ?? Singapore 0.4% 5 Indonesia 2.4% 0 Thailand 1.0%

-5 *in 2013 PPPs

-10 14 15 16 17 18 19 20

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 U24

Headwinds Abating For EMs As Their PMIs And Markets Recover, And Beijing Adds Stimulus.

China Mfg PMI Model (CSM) EMs had a rough 2018, in part due to the 3 Mo. Avg. 52.0 U24 hawkish Fed, US$ strength, and China slowdown. And there were idiosyncratic shocks: Brazil’s 51.5 Forecast trucker strike, Brazil’s & Mexico’s elections, U.S. Jun: 50.8% 51.0 U24 sanctions on Russia, and the Turkey/Argentina 50.5 currency crises.

50.0 But as the shocks’ impacts abated, and China’s

49.5 stimulus intensified, EM mfg activity started to Jan: 49.5% recover, which was echoed in the outperformance 49.0 Using SHIBOR, ICBC CDS, and Real TW Yuan of EM stocks. 48.5 EM ex China Mfg PMI (CSM) 14 15 3 Mo.16 Avg. Jan:17 51.3%18 19 20 U24 Looking ahead, aggressive Fed tightening is off 53 the table, and the dollar is weaker, two supports U24 for EM economies and markets. U24 52 ?? A stronger China will provide another boost. Many EMs are closely tied to China via trade and 51 FDI. The correlation between Chinese mfg PMI U24 U24 and EM PMIs ex China is 74%. U24 50 74% Correlation The U.S./China trade dispute remains a risk. with EM ex China Mfg PMI Stay tuned. 49 MSCI EMs U24 14 15 16 17 18 19 20 EM Mfg PMI (IHSMarkit) rel to MSCI World Future Output 2014 = 100 Feb 8 93.1 103 70 Jan: 60.9% 101 FYI: The forward-looking PMI from 99 IHSMarkit points to a pick-up in EM mfg. This measure includes China. 97 66 95 93

91 62 89

87 Oct 8, 2018 Oct 2018 85 58 14 15 16 17 18 19 20 14 15 16 17 18 19 20

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021 AppendixU24

Exposure To China

U24

U24 U24

U24

Chart Source: Congressional Research Service, “China’s Economic Rise: History, Trends, Challenges, and Implications for the United States”, Feb 5, 2018

This Report Is For The Sole Use Of Michael Kantrowitz. Please Do Not Forward. September 28, 2021