It may not feel like it yet, but China and the U.S. are in the midst of a cold war.
U.S. investors have recently discovered that the global technology sector is completely dependent on 17 rare metals that are mostly mined in China. Now the Chinese are talking about restricting our supply.
It's what countries do when they are at war. And investors are not prepared for the fallout.
We should have seen this coming. When the U.S. Commerce Department issued a directive asking American companies to apply for a license to do business with Huawei, the world's largest telecommunications equipment maker, the battle lines were drawn.
In the past, U.S. policy makers attempted to restrict the growth of Chinese technology companies by making it harder for Americans to buy certain products. For example, the military and government contractors were banned from using ZTE and Huawei smartphones since 2018. Losing one of the world's largest consumer markets was a real blow.
However, restricting American suppliers from doing business with a leading Chinese company is completely different. Huawei simply cannot build its cutting edge 5G communications equipment and smartphones without intellectual property licensed from American firms. This curbs ffdsupply to all end markets. It's a potential death blow.
China's veiled threats about the export of rare earth metals strikes the same sour note.
According to a 2014 Fast Company story, these metals are vital in the production of everything from smartphones, batteries and electric motors, to jet engines, MRI machines and fiber optic cables. The metals are even used by U.S. oil refineries to turn crude oil into gasoline and jet fuel.
And 80% of rare earth metals imported to the U.S. come from China.
Last year, 4,000 tons came to the United States, or $175 million in raw dollars. When compared to the $420 billion trade deficit with China, the number seems insignificant. However, impeding the flow would do serious damage to American manufacturers who have no current substitute.
The symmetry with the Huawei situation is probably by design. The Chinese are intimating that they intend to fight hard. Like the U.S., they too are willing to hurt domestic industries to win the trade war. And they have a distinct advantage.
The Chinese economy is completely manipulated. The state controls investment, currency and the infrastructure. It even directly controls the media.
Moreover, President Xi, the Chinese leader, has a lifetime appointment. He can afford to play the long game as President Trump frets about the impact to his 2020 presidential campaign.
Investors should not lose sight of what's happening. It is all being laid out. The trade war is escalating to the detriment of the global economy. Analysts are too optimistic about a resolution. Earnings estimates are too high, and that means lower stock prices ahead.
For stock traders, this is a call to arms. It's time to do something.
The easy call is to cut exposure to semiconductor businesses. This sector is most directly impacted by the trade war. It's the first logical casualty. But investors should also steer clear of companies with outsized China exposure of all kinds.
That's where it gets a bit trickier.
Apple (AAPL) is a China-dependent business. In its current configuration, the company is designed to benefit from the growth in Chinese consumer spending. Its 50 Chinese stores are supposed to be a license to print money. But given rising nationalism, and the fact Huawei makes a better device for China, that business is imperiled.
Investors should also avoid domestic retailers with strong Chinese supply chains. If you check the labels on your clothing, electronics and furniture, that's almost every retail business. Rising tariffs are a consumer tax, and that is bad news for Macy's (M) , Best Buy (BBY) and Restoration Hardware (RH) .
I have been telling investors to begin accumulating positions in select utilities and real estate investment trusts. In addition to spinning off income from dividends, many of these businesses have become very good growth vehicles.d
One of my current favorites is Americold Realty Trust (COLD) , the world's largest operator of temperature-controlled warehouses.
The company operates 156 facilities in the U.S., Canada, Australia, New Zealand and Argentina, and also holds a minority interest in a Chinese joint venture.
This is a mission-critical business. In a global supply chain, sped up by e-commerce and rising consumer expectations, it is absolutely essential for food manufacturers and grocers to have access to these facilities. And they have been lining up to give Americold a steady stream of rising rents.
The company has 2,400 different food companies under contract. Facilities are at full capacity.
Americold shares are up 25.3% in 2019, and the market capitalization has risen to $4.7 billion. The dividend yield is 2.5%. Management is experienced and appears first rate. However, the growth story has only begun.
Go figure. Cold storage might be the perfect way to beat the Sino-American cold war.
To learn more about Jon Markman's stock picks at the crossroads of culture and technology, check out his daily investment newsletter Strategic Advantage. To learn about Markman's practical research in the short-term timing of market indexes and commodities, check out his daily newsletter Invariant Futures.