Apple’s 10% plunge showed the impact of US-China trade tensions and represents an opportunity for investors to put capital to work, according to a leading wealth manager.
The tech giant endured a chastening day yesterday after its CEO Tim Cook, in a letter to shareholders, reported a slowdown in iPhone sales over the holidays in China, erasing $67 billion of its value. Cook said Apple expects revenue of $84 billion for the quarter, which is $7 billion less than predicted.
The news was not greeted well by the markets as fears intensified about a weakening of China’s economy and slowdown in global growth. The S&P 500 Index pared back some losses but was down more than 1.5% by early afternoon.
It was Apple’s first warning since 2002 and Arthur Salzer, CEO and CIO of Northland Wealth Management, believes that while the Cook-led behemoth remains a “monster” of a company, its growth is slowing. “When you are that large,” he said, “the law of diminishing returns start to affect a company.”
With year-over-year sales up 19% outside of China, Salzer said the revenue downgrade is not the end of the world but is reflective of a number of factors.
One of them is the stand-off between US and China, with President Donald Trump employing now-familiar negotiating tactics. Salzer expects a deal to get done sooner than consensus suggests because Trump “likes to look good in the end”. With that in mind, Salzer believes Apple’s woes are an opportunity to rebalance.
He said: “If I was someone like Warren Buffett, who owns about 5% of Apple’s stock, my guess is he’s been buying on this news. To have a 10% downdraft in this major name, to have this liquidity present itself, it’s probably a place where you can add to this type of name.
“I think people can put capital to work in anticipation of a trade deal getting done later in the year.”
He added: “Apple’s year-over-year sales are up 19% outside of China, which I find surprising … but that’s amazing. That weakness in sales coming out of China, I think it shows that some of these trade tensions between the US and China are really starting to take hold.
“We’ve seen 40 years of growth in China once they became more capitalistic but they are starting to get to a point where they can’t grow as much anymore.”
Salzer said he is starting to rebalance his portfolio and that if there is a large enough downdraft in the public markets, he will take money out of areas that didn’t decline and buy the S&P and global indices, therefore de facto buying Apple and other FAANG stocks.
So is Apple’s “Freefall Thursday” a company-only issue or is it a signpost of a slowdown in the global economy and part of a bigger picture. Salzer thinks it’s a combination, accentuated by the effects of US quantitative tightening, which has really kicked in during the past four months.
He explained: “What we saw in analysis is that if the US did not use quantitative easing, they would have needed to have interest rates at roughly -3.5%. If we look at where the Fed is today, just north of 2%, a -3.5% to 2% move, that’s 5% around zero!
“We’ve never really seen that kind of tightening before. It’s much, much larger than people think. There is a lot of liquidity coming out of the system that’s been added for the past decade.
“I think risk assets are starting to appreciate that lack of incremental buying at the margins. It’s not the end of the world but we don’t think it’s going to be another 2007-08 where you get a big whoosh and banks go under. Banks are much better capitalized.”
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