Photo: AFP / Robyn Beck

China Tower, a consortium that builds mobile broadband infrastructure, remains the top performer in the Hang Seng China Enterprises Index during the past year with a gain of nearly 50%. In fact, all the major player in the broadband infrastructure space have performed much better than the broad market.

ZTE, China’s second-largest manufacturer of telecom equipment, nearly went out of business when the US banned sales of handset chips to the firm early in 2018. Trading was suspended, and the stock (HK 763) fell 60% when it resumed. Since then, ZTE has posted strong gains.

Huawei, by far the dominant Chinese provider, is unlisted and employee-owned, so ZTE trades to some extent as a proxy for Huawei. Its strong performance this year suggests that investors aren’t worried about US efforts to exclude Huawei 5G infrastructure from key Western markets.

The only other big players in the 5G infrastructure space are Sweden’s Ericsson and Finland’s Nokia. They are well behind Huawei, which spends twice as much on R&D as the two Scandinavian firms combined. Political considerations, though, give them a tailwind.

Some countries will shift some or all of their spending from Huawei in order to stay on the right side of the US government. Ericsson and Nokia have traded very strongly over the past several months, in contrast to the miserable performance of European stock markets.

I expect the 5G boom to continue. This is a game-changing technology less important for its direct use in speedy downloads than for its indirect applications. The ability to transfer vast amounts of data very quickly and with 1-millisecond latency allows “things,” for example industrial automation systems, to talk to each other effectively. It isn’t quite another industrial revolution, but it comes close.

The broad market looks much less convincing, despite the past two days’ relief rally after the apparent resolution of the US budget standoff and good vibes coming out of the US-China trade negotiations.

Profit growth is slowing and probably will dip into the negative on a year-over-year basis, according to Factset’s tally of brokerage-house forecasts.

The bottom-up consensus of stock analysts still projects a profit rebound for the end of this year, but that forecast requires us to believe that the US consumer will hold up the economy and corporate profits more or less by itself.

Foreign earnings won’t grow in most sectors of the world economy, and the strong dollar will reduce the impact of foreign earnings on US balance sheets. Half of Europe is in recession already, and the eurozone just reported a year-on-year decline of 4.5% in industrial production. Japan’s economy is dead in the water. China is still growing, but US exports to China were down 36% year-on-year as of December; even a speedy resolution of the US-China trade dispute won’t produce an export recovery this year.

As I mentioned yesterday, the sharp drop in small business confidence and hiring plans reported by the National Federation of Independent Business could indicate a coming drop in employment growth – which has come exclusively from small business during the past year. There are also a few signs of stress in consumer finances.

The overall delinquency rate on consumer debt is quite low at around 3% (the “All” line in the above chart), but that is largely due to the tightening of credit standards after the 2008 crash. Banks simply don’t write mortgages for prospective homeowners with low credit scores. Where banks have relaxed credit standards, in auto and student loans, default rates have been creeping up.

All in all, the S&P 500’s long run of profit gains and the US economy’s Trump boom both seem past their use-by dates.

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