TheChek News Flow

European Oil Demand Is Shockingly Weak

• France (-124,000 bpd)
• Italy (-38,000 bpd)
• the UK (-36,000 bpd)
• the Netherlands (-85,000 bpd)

“The main source of weakness came from the implied demand readings, which were lower w/w for all seven main product groupings and lower than the average of February 2018 for all products except propane,” the investment bank concluded.

“The upswing in oil prices appears to have ended for now. It seems that the sharp rise in oil production in the US is having a slowing effect after all,” Commerzbank wrote in a note on Wednesday.

“Production at the Permian Basin, the largest shale play, is set to exceed 4 million barrels per day for the first time in March. As such, this shale play alone significantly exceeds the amounts produced by the United Arab Emirates, Brazil and Kuwait. Only five countries produce more oil than the Permian Basin, excluding the US,” Commerzbank noted.

Former Trump campaign chairman Paul Manafort “repeatedly and brazenly violated the law” and shows a “hardened adherence to committing crimes,” prosecutors told a Washington federal judge.

They recommended no specific punishment for those crimes, saying that is the practice of the special counsel. Prosecutors noted that federal guidelines call for a sentence of 17 to 22 years, although under Manafort’s guilty plea in his D.C. case, the statutory maximum he faces is 10. The special counsel said that they may ask for Judge Amy Berman Jackson to impose a sentence that runs consecutive to whatever punishment Manafort is given for related crimes in Virginia federal court.

Friday’s sealed filing, an unredacted version of which was published Saturday, helps pave the way for his sentencings in D.C. and Virginia scheduled for next month, as Robert S. Mueller III begins wrapping up his investigation into Russian interference in the 2016 election.

As part of his plea deal in September, Manafort, 69, acknowledged he was guilty of everything he was accused of both in Washington, D.C. and in Virginia: making millions as an unregistered lobbyist for Ukrainian politicians, hiding that money to avoid paying taxes, defrauding banks to pay his debts when his oligarch patrons fell out of power, and lying to cover up his crimes while trying to persuade witnesses to do the same.

But when he appears in front of Jackson on March 13, he will already have been sentenced for related crimes in federal court in Alexandria, Va., barring any change in the scheduling as now set for those hearings. Jackson could make the sentence she imposes run during or after his Virginia prison term. In Virginia, where Manafort was found guilty of bank and tax fraud at trial, there is no upper limit to his sentence.

In Alexandria, prosecutors have also asked only for a “serious” sentence. Federal guidelines in that case call for him to spend roughly 19 to 24 years in prison.

Mueller’s prosecutors have been handing off other pending legal matters to the U.S. Attorney’s Office for D.C., and the Department of Justice is readying for Mueller to formally conclude his work.

In New York, the Manhattan district attorney is preparing to charge Manafort with violating state tax laws and committing other financial crimes, a move designed to ensure Trump’s former campaign chairman spends time in prison if the president pardons him for the convictions stemming from Mueller’s probe, Bloomberg News and the New York Times reported Friday. Trump has not indicated whether he intends to pardon Manafort, though he repeatedly expressed support for him as his trial played out last year. New York’s double jeopardy law, which protects defendants from being prosecuted twice for the same crimes, could pose a challenge for the district attorney’s office, however.

Attorneys for Manafort are not due to file their sentencing recommendation in D.C. until Monday, having told Jackson that this week’s snowstorm made it harder to meet with their client in the Alexandria jail where he has been held, and asking for a delay.

Under his plea agreement in D.C. federal prosecutors had agreed to ask Jackson to give Manafort credit at sentencing for cooperation. But because she found he lied to investigators and breached that agreement, they are no longer bound by it.

[Read Manafort’s plea agreement in his D.C. federal case here]

Jackson found Manafort lied about his interactions with Konstantin Kilimnik, a longtime aide who the FBI assessed to have ties to Russian intelligence. Those contacts, prosecutors said in court, go “very much to the heart of what the special counsel’s office is investigating.”

Manafort gave inconsistent accounts of an August 2016 meeting in New York City at which he and Kilimnik discussed a peace plan for Ukraine, a top foreign policy priority for Russia. At the time, Manafort was still leading President Trump’s campaign. He also lied about sharing polling data with Kilimnik in 2016, prosecutors said in describing how he broke his deal to cooperate truthfully.

The judge also concluded that Manafort lied about a payment that he claimed was a loan and as part of another Justice Department investigation whose focus has not been described publicly.

Defense attorneys have maintained that Manafort did not intentionally give false information and that any inconsistencies were honest mistakes.

In 2017, Kilimnik denied to The Washington Post having connections to Russian intelligence. He was indicted with Manafort on charges of conspiring to obstruct justice through witness tampering.

Kilimnik is believed to be in Moscow and therefore probably safe from arrest because Russia does not extradite its citizens.

£3.6bn stuck in UK ‘orphan funds’, warns report

Research from Morningstar identifies nearly 200 sub-scale funds that can be poor value for investors

Almost £4bn of UK investors’ money languishes in so-called “orphan funds” — sub-scale funds with persistently low inflows and often high charges. Many of these offer such poor value they should be culled from the market, according to a new report.

At the end of last year, UK investors had £3.6bn invested in nearly 200 separate funds that have dwindled in size, according to data company Morningstar.

Morningstar claims these “dormant” funds perform a “disservice” to investors by lingering in the market despite failing to gain traction, and poor economies of scale mean higher costs are often passed on to investors.

“The sheer number of these funds shows the industry has launched far too many funds that are unwanted by investors,” said Jonathan Miller, director of manager research ratings at Morningstar UK. “There are too many funds in the market and our analysis highlights the extent to which small idle ones are surviving.”

Morningstar uncovered 196 UK-domiciled orphan funds in its report.

It defines an “orphan fund” as one that has failed to attract more than €100m (£86.9m) from investors after five years, and has persistently low inflows and outflows. Some of the funds named in its index had as little as £5m of assets at the start of February 2019.

Their small size means that fund charges tend to be comparatively high. For example, the average ongoing charge on “orphan” equity funds was 1.29 per cent, Morningstar found — practically double the 0.67 per cent charged by the average UK-domiciled equity fund.

Smaller funds often have higher cost bases because they do not benefit from the same economies of scale that larger funds command. The level of fees can weigh on performance too.

“Tiny funds are expensive to run, with the costs passed to investors,” said Mr Miller. “Where the past clearly shows there is little hope for the future of such strategies, [fund houses] should be doing the honourable thing and pulling the plug on them.”

Three of the funds picked up in the report — Neptune Quarterly Income, Neptune Global Smaller Companies and Neptune Global Income — all have less than £5m in assets. Of those, Neptune Global Income fund has returned less than half of the total return of the MSCI World index over the past five years.

Neptune founder Robin Geffen said: “Neptune has taken action with regards to all three funds — completely changing the fund type, portfolio and objectives for the Global Smaller Companies fund; changing the manager for the Global Income fund and merging the Quarterly Income fund to drive additional returns.”

He added that Neptune Global Smaller Companies was overhauled from a large-cap to a small-cap fund in 2016, explaining its size, and that Neptune Global Income was taken over by new manager, Storm Uru, in November 2017 when its performance improved.

Meanwhile, Neptune Quarterly Income will be merged into the £203m Neptune Income fund in April, reducing costs for investors.

Investment experts cautioned that small can sometimes be beautiful. Smaller funds can benefit from being more nimble and able to invest in more illiquid assets. But consistent unpopularity can be a bad sign and should prompt investors to work out whether a fund is good value or not, said Ryan Hughes, head of fund selection at AJ Bell.

“We all know there are too many products in the market, but every year we have a net gain of funds,” said Mr Hughes. “If a fund has been small for a long period and really isn’t going anywhere you need to think about it, because at a certain point the fixed costs are just too high and act as a barrier to performance.

“Such funds should be closed or merged into a fund with scale, or turned into something investors want,” he added, “but fund groups have no incentive to do that, as even small funds bring in revenue for the group.”

Investors should act by taking out old paperwork and checking whether their funds are “underperforming and saddled with high fees”, according to Morningstar.

Mixed asset funds of funds — a fund structure made up of a other funds, instead of stocks and shares — tend to be particularly problematic and often charge investors fees “north of 1.6 per cent a year”, the company said.

The analysis follows the introduction of sweeping new European rules for fund managers, known as Mifid II, which force managers to be more transparent about costs and charges.

Morningstar’s research also reveals that there are far more “orphan funds” in continental Europe — where investors typically buy funds through banks instead of independent financial advisers or fund supermarkets — than the UK.

Across Europe, some €80bn (£69bn) of investors’ money — around a quarter of European funds — was invested in orphan funds last year according to Morningstar.

“It remains to be seen if Mifid II can be the driver that brings the issues of orphaned funds to the fore by regulators,” said Mr Miller. “It is evident that investor outcomes are being affected, and this concern should get the wider attention it deserves.”

The cost-efficiency of active management has been a contentious topic in recent years, particularly as the number of low-cost passive funds has grown.

In its sweeping review into the asset management industry last year, the Financial Conduct Authority said asset managers should take more proactive steps to close or merge poorly performing funds.

It said: “While mergers and closures may improve outcomes for some investors, not all persistently poorer performing funds are merged or closed. It can also take a long time for worse performing funds to be closed or merged.”

The Brits have gone crazy for Greggs , a chain of 1,700 or so bakery shops, in part because of its wildly popular new vegan-sausage roll.

Unfortunately, investors have been gobbling up the stock (ticker: GRG.UK), which has jumped 68% in the six months to Thursday versus losses of 5.1% for the FTSE 100 index, the benchmark for the 100 largest listed stocks in the United Kingdom. It looks like the shares have gotten ahead of the sausage, and shareholders should consider taking profits.

“A lot of the good news is already being factored into the price,” says Graham Spooner, an investment research analyst at financial firm The Share Centre in Aylesbury, U.K. “They’ve had a phenomenal rise over the past few months.”

The sausage-powered popularity of the chain has driven the stock surge.

“We believe new customers (beyond vegan consumers) have been drawn to the Greggs offer by this product,” states a recent report from Barclays. “This will help boost the company’s earnings power in the medium term.”

Profits and revenue show steady improvement. Sales hit £983 million ($1.3 billion) for the latest 12-month period, up from 762 million pounds in 2013, according to Morningstar. Diluted earnings per share hit £0.59 in the most recent 12 months, up from £0.24 in 2013. That march higher should continue. Barclays sees the firm netting £0.80 and £0.86 a share this year and next, respectively.

Gross margins are growing. They exceeded 63% in the latest 12 months, up from just under 60% in 2013. Again, expect more of the same.

Gregg has figured out how to cope with the surge in customers. “At breakfast time, queue lengths have fallen, and that has the happy consequence of reducing the number of customers taking a look at the queue and going elsewhere,” states a recent report from British broker Peel Hunt.

These management changes have also come with reduced expenses. “Costs have been firmly marshaled,” Peel Hunt says.

Preliminary financials for 2018, which are expected on March 7, should show spectacular results. “The launch of our new vegan-friendly sausage roll has proved very popular with a broad range of customers,” Greggs said in a recent trading update. The snack costs £1 and rounds out the bakery’s offerings of meat-filled pastry.

Indeed, it has, but investors already know that and have pushed the stock price to levels only justifiable under highly unlikely circumstances.

For the stock to rally 20% from its recent price of £17.76, either earnings have to grow far more than expected or the price/earnings multiple needs to expand further, or both.

“To rate the shares as Overweight now, we argue that investors need to believe in further upgrades along with peak valuation,” which would mean a forward PE ratio of 25 and same-store sales growth of 9%, according to Barclays.

Neither looks likely, especially not the multiple expansion. A P/E multiple of 25 would equal the stock’s record high over the past two decades, according to Barclays. Shares currently trade at 18 times next year’s earnings, down from 21 and 19 in 2017 and 2018, respectively.

In addition to the stretched valuation, other risks abound for investors in Greggs. “There is lots of competition...and you can quickly see new companies appear,” says the Share Centre’s Spooner. The recent hype surrounding the vegan sausage roll could still prove to be a flash in the pan.

That’s why it makes sense to turn down the heat on Greggs, at least until the frenzy diminishes.

After an impressive January, South Africa turned into the sick man of emerging markets in February.

The iShares MSCI South Africa exchange-traded fund (ticker: EZA) has lost 7% this month, against a 1.5% dip in global emerging markets. Its currency, the rand, is off 5% against the dollar.

A Feb. 20 budget presentation by Minister of Finance Tito Mboweni only compounded the gloom. He cut an already anemic 2019 growth forecast to 1.5%, and projected budget deficits around 4.5% of gross domestic product for the foreseeable future. “While I never expected a positive budget speech, there was significantly more slippage than expected,” says Schalk Louw, a portfolio manager at PSG Wealth in Cape Town.

The proximate cause of South Africa’s downturn has been power outages that highlighted the financial woes of state utility Eskom, whose debt ballooned to 10% of national GDP under disgraced former President Jacob Zuma. Eskom’s debt-servicing costs are nearly twice its free cash flow, calculates Sandy McGregor, a portfolio manager at Africa-focused wealth manager Allan Gray.

The broader issue is the cautious, some might say crawling, pace adopted by current President Cyril Ramaphosa in cleaning up the multifarious mess that Zuma left behind. Ramaphosa, who unseated Zuma as African National Congress chairman by a whisker in late 2017, has prioritized holding the fractious ruling party together at least until elections this May. “The market wants action yesterday, but given the political calendar, the government can’t deliver right now,” says Kaan Nazli, senior economist for emerging markets debt at Neuberger Berman. Ramaphosa’s position on Eskom is typical—demanding budget cuts, but without layoffs.

The president won’t have a magic wand after the expected ANC victory, either, McGregor warns. South Africa’s commodities-based growth model fizzled after prices for exports like gold and platinum crashed from 2012 to 2014. But it substantially priced itself out of manufacturing investment with wages that have grown 30% faster than GDP for the past decade. Moves toward competitiveness confront labor unions, which remain a cornerstone of the ANC coalition, and statist reflexes that stymie even common-sense measures like easing visa restrictions for skilled foreign workers. “I’m skeptical about reforms accelerating postelection,” McGregor says. “South African business is tied up by bureaucracy.”

Nor will markets necessarily wait patiently until May. Moody’s , the only global credit agency that still ranks South African’s sovereign debt as investment grade, is due to revisit that judgment in late March. The investor consensus is that Moody’s may shift its outlook to negative without actually downgrading. But a surprise downgrade to junk status would force global fixed-income funds to withdraw $10 billion from the market, or about a quarter of the country’s currency reserves, Nazli says.

Ramaphosa’s go-slow politics has its benefits. He has defused, for now, the explosive issue of land redistribution, delegating it to open-ended blue-ribbon commissions while emotions have a chance to cool. Investors are hopeful for an eventual compromise that focuses on state land giveaways, while leaving the country’s critical crop-export sector little harmed. Where the president has moved, it has been in the right direction, installing respected professionals at Eskom and other woebegone arms of the state.

“South Africa needs one thing to reverse its problems, and that is confidence,” local investor Louw says. “Any possible improvement can bring about a massive reversal to a value market.” It’s hard to see the trigger for at least the next few months, though.

Cisco Systems, an early Silicon Valley success story, has become one of the nation’s top tech exporters. Today, roughly half of the networking giant’s sales come from outside the U.S. As foreign countries sought to catch up with U.S. connectivity, Cisco helped plug them in.

But a wave of nationalist thinking has put Cisco (ticker: CSCO)—and most of its peers—in an uncomfortable position. Earlier this month, Cisco CEO Chuck Robbins described the current climate as “one of the more complex macro, geopolitical environments that I think we’ve seen in quite a while with all the different moving parts.”

It’s likely to get worse.

While investors are cheering indications of progress being made toward a resolution of trade issues between China and the U.S., the battle for tech supremacy between the two global superpowers shows few signs of abating. Even as the White House was negotiating on trade with Beijing, it was also contemplating a U.S. ban of telecommunications equipment from Chinese companies like Huawei Technologies, essentially China’s version of Cisco. As President Donald Trump was tweeting about the importance of 5G on Thursday, Secretary of State Mike Pompeo was pushing U.S. allies to ditch Huawei.

This is a fight that is not going to end anytime soon. For years, U.S. officials have worried about Chinese equipment being used to infiltrate U.S. networks and businesses for possible espionage and theft of intellectual property. Even a resolution of the trade war won’t quell those fears.

“The perception is that too much of the information- and communication-technology supply chain is centered on China,” says Paul Triolo, who focuses on global technology policy issues for risk consulting firm Eurasia Group. “If we are in a conflict and using infrastructure built by China, they could theoretically hit a button and shut off everything.”

“After 30 years of saying companies should optimize supply chains and move some abroad, now we are saying it’s a security concern,” he says. “Adjusting to that is jarring.”

WELCOME TO THE NEW COLD WAR IN TECH.

For a short period last year, the Trump administration banned U.S. exports to Chinese telecom equipment maker ZTE (763.Hong Kong). Unable to get crucial components from U.S. suppliers, ZTE’s production was crippled, and its stock fell 40%.

The move had collateral damage, including U.S. optical networking company Acacia Communications (ACIA), whose own stock fell 35% in the days after the ban. Ultimately, President Trump reversed the ban and fined ZTE $1 billion instead.

Last August, Australia banned Huawei gear from its 5G networks. In January, the Australian wireless and internet company TPG Telecom (TPM.Australia) scrapped its plan to build a new mobile network, citing the ban. TPG shares are down 29% since late August.

For investors, these are early previews of the dangers to tech companies as their parent nations are pulled between the U.S. and China. Consider that Flex (FLEX), Broadcom (AVGO), Qualcomm (QCOM), Micron Technology (MU), Intel (INTC), and Qorvo (QRVO) each sold Huawei more than $90 million of equipment in 2017, the last full year of data, according to Gavekal Research analyst Dan Wang. All of those sales could be imperiled by a Huawei export ban that has been discussed by the Trump administration. For investors, a ban is a greater risk than the cyclical slowdown already weighing on the chip industry.

At the same time, China is no longer content to be the world’s factory for low-cost goods, pushing its own homegrown companies to challenge the global positions of established tech leaders. For China, technology is central to its ambitions to be a global power, a topic that goes well beyond trade agreements.

Western Europe is already caught in the middle. Ostensible U.S. allies are being pressured by the Trump administration to take a tough line with privately held Huawei. European telecom operators, however, have spent years buying Huawei gear. Vodafone, a top United Kingdom telecom provider, has temporarily banned Huawei from the most critical parts of its network. But both Germany and the U.K. are leaning against an outright ban, The Wall Street Journal has reported.

The U.S., meanwhile, has stepped up its crackdown. In December, at the request of the U.S., Canada arrested Huawei Chief Financial Officer Meng Wanzhou on charges of bank and wire fraud. The company has repeatedly denied those charges as well as spying allegations. Huawei did not respond to requests for comment.

Huawei has become a major player in the telecom space by undercutting rivals like Cisco and Nokia (NOK). The Shenzhen-based company’s revenue has risen to an estimated $109 billion last year from $18 billion in 2008.

“We have experienced price-focused competition from competitors in Asia, especially from China, and we anticipate this will continue,” Cisco warned in its latest annual report.

Congress has introduced bipartisan bills to ban the sale of U.S. chips and components to Huawei and other Chinese telecom companies breaking the law or violating sanctions. Lawmakers finding common ground on the issue illustrates the magnitude of the threat, which has been complicated by U.S. companies turning to China’s 1.4 billion consumers for growth.

Lately, however, U.S. companies have felt the pain of more-insular Chinese consumers, who have been encouraged to buy local goods. China weakness was the focus of Apple’s rare revenue warning earlier this year.

Mergers are another likely casualty, as the U.S. and China each add new reviews of cross-border deals. Last year, the Trump administration blocked chip maker Broadcom, then based in Singapore, from buying Qualcomm because of its Chinese connections. Qualcomm dropped its own bid for NXP Semiconductors (NXPI) of the Netherlands last year after China’s review board, the State Administration for Market Regulation, dragged its feet. In its latest annual report, Qualcomm warned that “future acquisitions may now be more difficult, complex, or expensive to the extent that our reputation for our ability to consummate acquisitions has been harmed.”

China’s investments in the U.S. fell to less than $5 billion last year from $46 billion in 2016, according to Rhodium Group.

The shifting dynamic is a costly distraction, at best, as tech companies come up with contingencies and look to shift production out of China. But the real worry is that as the U.S. and China try to protect their own interests, they may take down the entire tech ecosystem along with all of the innovation it produces.

Wall Street’s tech analysts can’t model for an end to innovation. But that doesn’t mean investors should dismiss the risk.

“It’s absolutely something we have to think about in terms of the assumptions we are making about revenue and margins,” says Steve Smigie, senior investment analyst for GQG Partners, which oversees nearly $19 billion.

Take Huawei. If the company is hit with an export ban similar to the one imposed on ZTE, Wang of Gavekal Research says the company would be unlikely to survive. While a collapse might be seen by U.S. officials as a cold war victory, it would reverberate throughout the global economy. Huawei has six times the sales of ZTE, and its gear is used in 170 countries.

While the tech cold war remains largely theoretical, Barron’s spoke to policy watchers, fund managers, and industry analysts to come up with a basket of stocks already feeling effects from the tech battle.

THE HARDEST HIT: CHIP STOCKS

Semiconductor chips are the brains for just about anything with an on-and-off switch. Chips also happen to be the Achilles’ heel for China, making them a major battleground in a tech cold war. Despite several pushes in past decades to create its own semiconductor industry, China makes just 30% of the chips it needs, according to a report by Deloitte.

Chip stocks had a rough fourth quarter last year, hit by concerns about tariffs and a cyclical downturn. The PHLX Semiconductor Index has rebounded 17% to start the year.

The threat of export restrictions, however, still looms over the industry. “It has made it extremely hard to have conviction on a lot of these names,” says John Vinh, an analyst with KeyBanc Capital Markets, who has a Sector Weight on much of the industry he covers. “The ban on ZTE had a ripple effect through the chip industry. A ban against Huawei would have a much more significant impact. I would be cautious on any trade deal. China still has issues that we wouldn’t be out of the woods on, even if there is a resolution.”

THE MOST TO LOSE: MICRON TECHNOLOGY

Micron, the No. 1 memory chip maker in the U.S., is one of Huawei’s suppliers and would be in the crosshairs of any export ban. Even absent a ban, Micron will struggle as China tries to reduce its reliance on U.S. suppliers.

Analysts estimate that China is at least five years away from chip independence, but it is having initial luck on lower-end chips, like the flash memory used in smartphones. Since the focus is on building self-reliance, not necessarily profitability, China’s chip push could spell pricing-related trouble for entrenched rivals like South Korean giants Samsung Electronics (005930.Korea) and SK Hynix (000660.Korea), and U.S.-based Micron. Micron is less diversified than Samsung and could also lose out if China begins to favor Asian suppliers to hedge its bets. Micron declined to comment on China’s chip initiatives.

The company has publicly told investors that competition always exists and that the China threat is nothing new. In its annual filing, however, Micron includes the following risk: “The threat of increasing competition as a result of significant investment in the semiconductor industry by the Chinese government and various state-owned or affiliated entities that is intended to advance China’s stated national policy objectives. In addition, the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies.”

While Micron benefits from long-term trends around artificial intelligence and autonomous cars, Goldman Sachs chip analyst Mark Delaney recently warned in a note that memory pricing broadly could deteriorate another 20% or more in the first quarter, with further declines in the second quarter. He recently cut his 2019 earnings estimate by 14%, to $6.27 a share. At a recent $43, Micron is already one of the cheapest stocks in the S&P 500 index based on next year’s consensus earnings estimates. But the U.S.-China dynamic makes even this cheap stock a risky bet.

WELL POSITIONED: HUAWEI’S COMPETITION

Huawei has spent several years challenging the established network infrastructure players like Cisco, Nokia, Ericsson (ERIC), Ciena (CIEN), and Juniper Networks (JNPR). Any move away from Huawei, therefore, would benefit these companies.

Their routing and switching gear sit in the core of telecom networks where traffic is aggregated—the very area that intelligence experts fear could be targeted by Chinese spyware.

“We believe over a third of the mobile infrastructure and software market that IHS values at $47 billion in 2019 presents a battleground along with the nearly $15 billion routing and optical markets,” Raymond James analyst Simon Leopold wrote to clients last month.

Cisco is the safe play and would be a winner if the Trump administration follows through on an executive order banning Huawei from U.S. 5G networks. Huawei products are already limited in the U.S., but a ban could spur European allies to take similar steps, and their networks use Huawei.

“ Taiwan Semiconductor ‘is critical for both the U.S. and China and not in the hands of either.’ ”

—Bhavtosh Vajpayee, Oppenheimer Developing Markets Fund

Cisco has an additional advantage over its rivals. The company only gets about 3% of its sales from China, making it less vulnerable to retaliation—something the company is familiar with. In 2015, China blacklisted Cisco, along with several other U.S. companies, from its government-approved purchase lists, after revelations by Edward Snowden that the U.S. National Security Agency had intercepted Cisco routers to install surveillance tools.

The catch for Cisco is that its diverse business—a quarter of its sales come from selling routers and switches to service providers—limits the impact from any share gains from Huawei. Nokia, Ericsson, Ciena, and Juniper are more exposed to the category. Leopold estimates that Nokia could see share gains worth about $740 million, or 2.5 to three percentage points of incremental sales growth.

THE NEUTRAL PARTY: TAIWAN SEMICONDUCTOR MANUFACTURING

If there is a Switzerland in this technology cold war, it is Taiwan Semiconductor Manufacturing (TSM), the world’s largest semiconductor manufacturer. The company’s knack for speedy innovation and ability to help companies modify their designs to improve their chips has made it a go-to manufacturer for a who’s who of technology, from U.S. companies such as Apple (AAPL) and Qualcomm to their Asian rivals like Huawei and MediaTek.

Taiwan Semi is roughly five times the size of its next closest rival, privately held GlobalFoundries, putting the company in a rare safe position in the tech cold war—and making it an attractive option for investors. “This is an asset that is critical for both the U.S. and China and not in the hands of either,” says Bhavtosh Vajpayee, an analyst on the $39 billion Oppenheimer Developing Markets fund, which owns Taiwan Semiconductor.

Taiwan itself is trying to maintain a similar neutral position. The island is to chips what Saudi Arabia is to oil. Taiwan accounts for about 60% of global capacity to make customized chips, like those used for AI or cameras in smartphones. But it’s impossible to ignore Taiwan’s precarious political position. Self-governed, it relies on the U.S. for military protection, but its economy relies on China—which considers it a province.

The natural question: Could China force Taiwan Semiconductor to cut off the U.S. or start a boycott? The company has been preparing for multiple crisis scenarios for years and has diversified its business to protect against things like a boycott, says Alberto Fassinotti, a portfolio manager for emerging market equities at global investment manager Rock Creek Group. Taiwan Semiconductor did not respond to a request for comment.

Analysts say any attempt by China to cut the U.S. off from accessing Taiwan and its chips would be challenged by the U.S., possibly turning a cold war into a hot one and upending all types of investment theses.

Taiwan Semi is a top holding for many global fund managers. The company’s strong balance sheet and 2.7% dividend yield offer investor protection, but those looking to buy may want to wait. Earnings estimates may still be too rosy, given the confluence of pressures facing the broader chip industry. Currently trading at 18 times forward earnings, the stock becomes more attractive below its historical average of 15 times, fund managers say.

CHINA’S INNOVATORS: THE BATS

Baidu (BIDU), Alibaba Group Holding (BABA), and Tencent Holdings (700.Hong Kong) dominate every aspect of the internet in China and drive much of the nation’s innovation. The companies have made aggressive pushes into digital payments, AI, and autonomous vehicles. But their reach extends well beyond China.

The companies have invested billions of dollars globally. Tencent is one of the world’s most active and aggressive tech investors, with stakes in Snap (SNAP), Activision Blizzard (ATVI), Tesla (TSLA), and Spotify Technology (SPOT).

Baidu, Alibaba, and Tencent also are China’s ticket to becoming a more dominant technology player, which makes them attractive investments in the tech cold war. The BATs together also hold stakes in more than half of China’s 124 unicorns, (startups valued at more than $1 billion), according to a report by Deloitte.

“The Chinese government is very aware that if it wants to reach its goals, they need these companies to invest,” says Brian Bandsma, a manager on the Vontobel Emerging Markets strategy that oversees $15.7 billion and owns Tencent and Alibaba. “And companies helping China achieve its objectives will have more flexibility, allowing these companies to go into ancillary businesses with little competition and shielding investors from regulatory risk.”

The companies are still grappling with their own challenges—China’s economic slowdown is denting Alibaba’s sales, increased investment and marketing are pressuring Baidu’s margins, and regulations around gaming loom over Tencent’s stock. Those challenges are now reflected in the stocks. The three companies lost a total of $229 billion in market value last year, and each trades below its five-year price/earnings ratio. They may be China’s—and investors’—best hope for remaining part of the global tech landscape.

A hedge fund’s triumph in a bitterly fought battle over debt did collateral damage to two stocks this past week and now threatens a company’s viability.

The episode serves as sobering illustration of what can happen when a company’s stakeholders are misaligned.

A week ago, a federal judge ruled that network communications company Windstream Holdings (ticker: WIN) had violated bond covenants when it spun off its fiber-optic cable business into a new company called Uniti Group (UNIT) in 2015. The ruling, which agreed with a 2017 claim brought by the plaintiff, hedge fund Aurelius Capital Management, was “stunning and unexpected,” as credit research firm Covenant Review put it.

Aurelius had argued that Windstream owed full repayment, plus interest—which would be about $300 million to Aurelius, and $5.7 billion in total, according to Bloomberg Intelligence. Windstream has said that such a bill would bankrupt it. The court dismissed Windstream’s counterclaims against the hedge fund and awarded Aurelius a judgment of more than $310 million.

The ruling caught equity investors by surprise. Windstream’s shares plummeted 75% this past week, and Uniti, which depends on Windstream for lease payments, slid nearly 54%.

The decision also showed “how sensitive and dependent many companies are to the capital markets, and how quickly credit quality can erode,” according to Janney Montgomery Scott.

Windstream, which is based in Little Rock, Ark., has postponed reporting its financial results until no later than March 18. It ended September with $37.3 million in cash and cash equivalents, and since then has sold assets, raising almost $400 million.

Still, there is plenty of room for more chaos. Windstream says it plans to appeal, and will likely ask the court for a stay on the judgment. Aurelius must file a draft proposed judgment to the court by Feb. 25. Rumors, meanwhile, are flying about white knights swooping in to offer Windstream better financing.

A white knight could add a new dimension to this dispute. Aurelius is widely understood to have a position in credit-default swaps, betting on the company’s default, though the fund won’t say whether it actually does or doesn’t.

The process of triggering those contracts is still in play. So, in theory, there are firms that sold CDS who are facing a large potential payout. If gaming such defaults is now cool and normal, why not offer Windstream a loan and avert such a payout?

The CDS potential has yielded comparisons to when Blackstone Group ’s (BX) GSO Capital Partners offered Hovnanian Enterprises (HOV) attractive financing that involved a default beneficial to GSO. In that case, the home builder benefited, and the only one who objected was a bondholder, Solus Alternative Asset Management. But regulators made unhappy noises, so Blackstone and Solus settled.

After the Windstream trial concluded last year, Barron’s called Aurelius the “cop of the capital markets” as it looks for infractions, helping to bridge the gap between language in the bond documents and the real world.

Indeed, this episode could be seen as a refreshing pushback on permissive corporate behavior, following years of investors accepting looser and looser promises as they elbowed each other to buy new bonds in a never-ending rally.

Are there companies harboring the guilt of having broken a promise years ago that are now terrified that Aurelius might find out and ruin them? Do stock investors now need to read every bond document for any covenant that could be interpreted as broken?

Probably not. Most breaches worth stress-testing probably already have been. Maybe this ruling means that the surviving covenants will be closely watched and enthusiastically enforced, at least by Aurelius.

Lighter covenants mean fewer triggers bringing debtor and creditor back to the negotiating table. That can mean that more asset burn. Loose covenants may stress out investors, but no bondholder joined Aurelius on Windstream, and it’s not clear anyone wants to follow the hedge fund down that path.

Aurelius’ priorities were different, perhaps because of the CDS position it’s said to have. CDS can subvert a publicly understood position, even turning an investor into a villain that the New York law firm Wachtell, Lipton, Rosen & Katz once called a “net short debt activist,” whose negative bet outstrips its positive one.

In fact, Aurelius antagonized fellow bondholders in a public statement after the judge’s ruling, wishing them luck because they would “need it.” Covenant Review called it a “celebratory” release that “chastised” Windstream, “taunted” other noteholders, and “unabashedly ‘spikes the football’ after scoring a touchdown at trial.” It left a bad taste for other market participants, involved or not.

Through a spokesperson, Aurelius declined to comment. Windstream also didn’t respond to requests for comment.

For Windstream, the consequences could be severe. Bankruptcy is very expensive. If Windstream files, wiping out the equity and taking a haircutting to the debt, Aurelius will have taken money from shareholders—and possibly customers, if the company increases prices.

Over the past decade, companies have optimized for the cost of capital, aiming to meet intense demand for dividends and shareholder-friendly behavior, while not getting punished for issuing more debt. This helps account for the ballooning supply of BBB-rated bonds.

Aurelius doesn’t care about stocks, and perhaps doesn’t even care much about bonds in this case. But it has messed things up for those other stakeholders.

This sorry outcome is a result of too many stakeholders bickering over the same challenged company. Shareholder value didn’t square with recouping value for bondholders, and Aurelius’s vision of value wasn’t shared with other bondholders. There wasn’t enough value to go around.

The judge excluded the CDS issue in his decision, but an appeals court might not. The outcome rests on whether the next court chooses to reincorporate the warring structures and incentives.