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Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

Global markets continue to digest the impact of President Donald Trump’s Sunday evening tweetstorm. Meanwhile, analysts from some of the world’s biggest investment banks including UBS and Bank of America Merrill Lynch have detailed their forecasts for what a full-on trade war between the U.S. and China would look should the worst happen.

Among the many hair-raising projections is the prospect of the S&P 500 entering a correction by losing 10% of its value, which would almost certainly trigger a long-feared recession. That particular forecast was made by UBS analyst Keith Parker, according to CNBC. Parker specified that key European and American cyclical markets would bear the brunt of the declines.

S&P 500

| Source: Yahoo Finance

“FASTEN YOUR SEATBELT AND DON’T HOLD YOUR BREATH”

There is an old saying that when two elephants fight, it is the grass that suffers. In this case, both elephants will also sustain a significant amount of damage if Parker’s projections hold true. He predicts that a full-scale trade conflict between the world’s two biggest economies will see China shed anything from 1.2% to 1.5% of its GDP, which is equivalent to a drop of between $132 billion and $165 billion.

If China responds to Donald Trump’s threatened 25% tariff with a tariff increment of its own from 7% to 15% on approximately $60 billion worth of American imports, this could see the U.S. shed 0.1% of its GDP, or about $14 billion. In the ensuing scenario, Bank of America projects that China may hike tariffs on U.S.-made vehicles and reduce its soybean imports from the U.S. Meanwhile, Chinese imports of American soybeans have already fallen off a cliffsince 2017, dropping roughly 98% last year as China looks toward less antagonistic partners like Brazil.

According to a Bank of America report also cited by CNBC:

“Fasten your seatbelt and don’t hold your breath. The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”

As the two elephants knock heads, the amount they are erasing from each other’s economies is equivalent to the GDP of mid-sized nations. European and Asian economies will also feel some pain, according to UBS.

IS TRUMP BLUFFING?

According to the White House, the new 25% tariff regime that could potentially kick off this entire sequence of events will come into effect just after midnight on Friday. Expectedly, markets have been in virtual freefall since Monday, with the NASDAQ and S&P 500 both shedding close to 1% on Monday alone. The miserable market conditions continued through Tuesday, with little sign of respite as investors react with horror at the thought of a damaging 20th-century-style trade conflict between economic superpowers.

Dow

The Dow Jones Industrial Average continues to trend downward following Sunday evening’s shock announcement. | Source: Yahoo Finance

Not everyone believes that the panic is warranted, however. JPMorgan CEO Jamie Dimon, for example, believes that the shock announcement by Trump was nothing more than a way of cornering a formidable opponent and forcing them to negotiate. Speaking to CNN Money’s Poppy Harlow, Dimon stated that regardless of the market’s reaction, Trump will count it as a win because it has become the only successful way of getting the Chinese to the negotiating table on his terms.

Whether this is a considered masterstroke of strategy or simply a typical Trump action, it certainly appears to have done the trick. Chinese Vice Vice Premier Liu He will be part of a trade delegation to the U.S. later in the week, which at the very least is a sign that China is willing to give ground so as to avoid a damaging trade war.

Source: Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

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5 Reasons Alibaba Is Just Going to Go Up From Here – Natalie Walters

Alibaba founder Jack Ma celebrate onstage during Alibaba's annual party

Alibaba (NYSE: BABA) has reported over 50% revenue growth in the past eight quarters. The Chinese e-commerce giant just won’t stop growing, and investors are taking notice. Alibaba’s stock has gone up about 122% in the past two years, including a 63% climb in just the past year to a still relatively cheap $196.61.

But despite the run-up, Alibaba still has plenty more room to run. For the upcoming fiscal year, the company is guiding for another impressive year of revenue growth of 60%. And while Alibaba still relies on its e-commerce platforms for the bulk of its revenue, its other projects are showing healthy growth and will contribute more and more in the coming years.

1. Alibaba’s revenue growth is strong

Alibaba’s revenue growth has been the highlight of the past two years, with each of the eight quarters showing over 50% growth.

Its annual revenue gives a better picture of how the company’s growth has really taken off in the past two years. For the past four fiscal years ended in March, Alibaba has reported revenue growth of 45%, 33%, 56%, and 58%, respectively. As you can see in the chart below, that means Alibaba’s revenue has more than doubled since 2015 from $19.5 billion to $40 billion.

 Fiscal Year  BABA Revenue Growth  BABA Revenue
 2015  45%  $19.5 billion
 2016  33%  $15.7 billion
 2017  56%  $23 billion
 2018  58%  $40 billion
 2019 (expected)  60%  TBA

Data source: Quarterly earnings press releases.

And Alibaba is expecting revenue growth to continue this exciting trend with 60% growth for fiscal 2019. If you were to exclude the consolidation of food delivery platform Ele.me and logistics network Cainiao, revenue growth is still expected to be over 50%.

But even 50% growth might be a low estimate, because Alibaba tends to be cautious with forecasts. For the 2018 fiscal year, Alibaba originally guided for 45% to 49% revenue growth before revising it to between 55% and 56% growth and, ultimately, hitting 58% growth. And for the 2017 fiscal year, Alibaba originally guided for 48% growth but ended up hitting 56% growth. So as high as 60% and even 50% revenue growth might seem for 2019, they may actually be low estimates.

2. Alibaba’s New Retail initiatives are taking off

Alibaba executive chairman Jack Ma believes he can help save brick-and-mortar stores by giving them a “New Retail” makeover that combines the best of offline and online shopping. This is important for Alibaba’s growth because e-commerce still only accounts for 20% of shopping in China, while offline accounts for the other 80%, according to eMarketer. So Alibaba needed a way to gain access to those brick-and-mortar sales it had been missing out on.

By helping physical stores move online, Alibaba is attempting to digitize all of China’s retail market, Alibaba executive vice chairman Joe Tsai said on the latest earnings call. If the project continues as planned, Alibaba’s total addressable market (TAM) will one day be all of China’s $5 trillion retail market, according to Tsai. This presents a huge growth opportunity for Alibaba to expand its TAM.

Right now, Alibaba’s main New Retail projects include Hema supermarkets, Intime department stores, and Tmall Import. For the last quarter, Alibaba said its China commerce retail segment’s 56% revenue growth to $6.4 billion was largely a reflection of the growth in its New Retail projects.

3. Alibaba’s international growth is heating up

Another area that holds huge growth potential for Alibaba is international markets. For the past fiscal year ended in March, Alibaba’s international commerce retail revenue shot up 94% year over year to $2.3 billion.

Alibaba is using its Lazada business to aggressively pursue the Southeast Asia e-commerce market. In the past quarter, Alibaba announced that it would invest $2 billion in the business, bringing its total investment into Lazada to about $4 billion. And Alibaba’s other main international business, Tmall Global, is the top cross-border e-commerce platform in China, according to Analysys.

4. Alibaba still has plenty of room to run in China

With a population of 1.4 billion people who are still gradually moving to online shopping, China still holds big potential for Alibaba. Last year, China as a whole saw an increase of 32.3% in online sales to $1.1 billion, according to the China Ministry of Commerce. And Alibaba’s Tmall platform that operates in China already claims 51.3% of all those online sales in China, according to eMarketer.

But with New Retail, Alibaba stands to benefit even more from China’s retail economy. The country’s total retail sales are expected to grow 10% annually to reach $7.2 trillion by 2020, according to the Ministry of Commerce. If Alibaba believes that whole market — both online and offline — can become its TAM, then that’s a lot of growth potential in the near future.

5. Alibaba’s cloud segment is on fire

Alibaba’s cloud segment has shown year-over-year revenue growth of over 100% in 10 of the past 12 quarters. For the year ended this past March, Alibaba Cloud’s revenue was up 101% to $2.1 billion.

Alibaba is currently the IaaS market leader in China, claiming 47.6% market share, but it’s also expanding internationally. This past quarter, Alibaba added a cloud data center in Indonesia, which brought its global cloud-computing presence to a total of 18 countries and regions.

The company has plenty of room to run here as well. Alibaba Cloud is the No. 3 worldwide IaaS provider but has just 3% of the market, compared to Amazon‘s (NASDAQ: AMZN) 44.2% and Microsoft‘s (NASDAQ: MSFT) 7.1%, according to Gartner estimates. But Alibaba Cloud is crushing both companies in revenue growth, which is a good indication that it’s working on taking away market share from these two leaders.

 

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