With both Beijing and Washington seeking to impose new tariffs of $34 billion against each other, some market strategists have expressed concern that a collapse of the global trade could hurt companies with large overseas markets. Those seeking protection against an escalating trade war between the United States and its economic allies should consider buying shares from domestic, customer-facing companies, according to the strategists.
“Cyclical stocks with a high percentage of foreign sales tend to be most threatened by the potential for increased trade tensions,” wrote Credit Suisse president Jonathan Golub in a note earlier this year. “Another potentially lucrative approach to trading trade tensions: focus on interest rate impacts. More specifically, an increase in tensions would lead to a rise in recessionary concerns and a decline in yields, leading to a rotation away from financials and toward bond proxies.”
Utilities led the sector gains over the past month, up more than 10% against the S&P 500’s decline of 0.4%. Meanwhile, the recent rise in stock prices for companies such as NextEra and Duke Energy has tracked the lower interest rates during the same period. Credit Suisse said that various global players such as Baker Hughes, Mosaic and 3M would be most vulnerable if trade relations were more complex. All three stocks were lower than the broader stock market over the last 30 days.
In the same context, Goldman Sachs told investors to look at local, consumer companies as a way to safely overcome uncertain trade policies. “Many Trump campaign proposals, such as infrastructure spending and tax reform, that investors had expected would boost US growth have not been implemented,” wrote the bank’s chief strategist. Tariffs or trade disputes would likely benefit stocks with high domestic sales relative to export-oriented firms.
“Although our economists have estimated that the effects of tariffs on growth would vary depending on size, foreign retaliation and time horizon, US equities appear to be relatively insulated,” the chief strategist added. “Foreign sales account for just 31 percent of S&P 500 revenues; smaller firms such as those in the Russell 2000, which derive 80 percent of revenues domestically, are even less exposed.”
According to analysts, the sectors that are experiencing high rates of exposure to foreign revenue exposure include information technology, materials and energy. Meanwhile, the sectors that have the lowest sales abroad include telecommunications, utilities and real estate. Although there may be only a few winners during the trade war, consumer names would be relatively safe.
Domestic, consumer-oriented stocks are likely to perform better. Some of them may do well if they are very defensive. If bond yields fall as a result of the more cautious Fed, utilities can also do a good job.
Others have also suggested looking at small-cap stocks as a way to overcome the global trade crisis.
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