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Nvidia crash shows dark side of the Trump trade

Donald Trump’s comments on Taiwan added to a global sell-off in computer chip makers. The episode has three big lessons for investors.
Jul 18, 2024 – 11.03am


And it was all going so well.

In the couple of days following the assassination attempt on Donald Trump, markets seemed to be revelling in new-found certainty about the outcome of November’s presidential election.

With Trump looking like he would cruise to the White House and deliver tax cuts, looser regulation and market-friendly administration, Wall Street promptly delivered another set of all-time highs.

But on Wednesday night, the party came to an abrupt halt, as comments Trump gave to Bloomberg Businessweek, implying that he would not necessarily defend Taiwan from a Chinese attack, sent shockwaves across the world.

“Taiwan took our chip business from us. I mean, how stupid are we?” Trump said, suggesting he wouldn’t act as the tiny nation’s insurance against Chinese aggression.


“They took all of our chip business. They’re immensely wealthy … I don’t think we’re any different from an insurance policy. Why? Why are we doing this?”

Cue global sell-off.

US-listed Nvidia, the darling of all sharemarket darlings, fell 6.6 per cent. Taipei-listed Taiwan Semiconductor Manufacturing Co, the industry’s most important chipmaker (and the company that actually manufactures Nvidia’s world-leading designs), dropped almost 3 per cent. Japan’s Tokyo Electron closed nearly 7.5 per cent lower. Holland’s ASML, which makes the photolithography machines that are vital to producing chips, crashed 11 per cent. A range of other chipmakers or adjacent companies, including Arm, Marvell, Qualcomm and Broadcom, were all down more than 7 per cent.

The timing of Trump’s comments couldn’t have been worse. Earlier in the day, reports from Bloomberg suggested the Biden Administration, seemingly in its last months, has told Western allies that it is considering using something called the foreign direct product rule, which lets the US impose controls on foreign-made products that use even the tiniest amount of American technology, to clamp down on companies exporting chip making equipment to China.

ASML provides a neat example of how this could hurt. It actually released its June quarter results on Wednesday night that easily beat analyst expectations; its net orders in the quarter were 24 per cent higher than the prior year, as demand for artificial intelligence chips soars.

But those results also showed just how reliant the Dutch company is on China: 49 per cent of total revenue in the quarter came from China, and sales grew 21 per cent during the period.

ASML has never been allowed to sell its most advanced equipment to China, but it has already warned that tighter US export restrictions would likely cut its existing Chinese sales by 10 per cent to 15 per cent.

The obvious fear is that even tighter curbs out of the Biden administration – or a Trump White House, for that matter – will crimp ASML’s ability to grow earnings. The stock is up 336 per cent in the past five years, so there’s an awful lot invested in its growth story.

It might well be that this mini-rout in chip stocks passes pretty quickly, and both the AI trade and the Trump trade get back on track within a few days.
AI not bullet-proof

Still, a few lessons can be extracted from this episode.

First, Trump might be broadly pro-markets, but he will also be a source of volatility and uncertainty. Most of what he says is noise rather than signal, but his obvious doubts as to whether Ukraine and Taiwan deserve the same level of support they are currently receiving from the US government do have serious geopolitical ramifications.

Secondly, Wednesday night’s sell-off is a reminder that the AI trade is not as bullet-proof as the market appears to believe. In the context of the 153 per cent rise in Nvidia’s shares since the start of the calendar year, a 6.6 per cent fall is hardly cause for concern. But it’s worth remembering that most of the gains on equity markets this year have come from a handful of AI-related stocks that are arguably on the front line of geopolitical concerns.

Finally, Wednesday night’s action is a reminder that both sides of US politics are determined to out-hawk each other on China. Trump’s political base clearly loves it when he ramps up the anti-China rhetoric, and Trump loves playing to his base. Even leaving aside the military threat to Taiwan, Trump seems determined to hit China with tariffs that will upturn global trade.
That should be a serious concern for Australia and Australian investors, who’ve ridden the Chinese dragon for so long.