Trade War Heats Up: Here Are the Winners & Losers
Wall Street now braces for a full-fledged trade war between two of the world’s largest economies as the United States bumped up tariffs on $200 billion worth of Chinese products. Unfortunately, last minute talks between U.S. trade representative Robert Lighthizer and Chinese vice premier Liu He failed to salvage months of encouraging reports hinting at substantial progress in trade talks.
Tariffs on Chinese goods have risen to 25% from 10%, and Beijing has pledged to retaliate. China’s Commerce Ministry said that “the Chinese side deeply regrets that it will have to take necessary countermeasures.†The Ministry added that “it hoped that the U.S. and the Chinese side will work together to resolve existing problems through cooperation and consultation.â€
The situation might worses as President Trump threatened to levy tariffs on all Chinese goods with America. And this means imposing tariffs on the remaining $325-billion worth of Chinese products. His moves will invariably affect more than 5,000 China-made products, including fresh and frozen foods, chemicals, textiles, metalwork, building materials, electronics and consumer goods.
But, why are the United States and China at odds? China has always faced Trump’s wrath. Trump criticized trade imbalances between the countries. Protection of intellectual property rights by the way continues to be a bone of contention for the economies. Chinese delegates said that they will deal with such issues but Trump wants “strong enforcement language’’ to police any deal. China views the trade war as U.S.’ attempt to curb its growing influence across the globe.
Nonetheless, investors are worried that the trade war might easily destabilize an already-slowing global economy and raise tensions between the superpowers regarding South China Sea and industrial espionage. The International Monetary Fund, in the meantime, warned a tariff war would pose a “threat to the global economy.†The body, which aims to ensure global financial stability, asked for a speedy resolution.
With possibilities of a heightened U.S.-China trade war looming, the stock market is bleeding. But not all stocks are facing the brunt. Let us, thus, look at the potential winners and losers from the trade war —
Two Tech Stocks That Avoid U.S.-China Trade Exposure
Technology stocks aren’t in great shape, especially, Apple. Thanks to trade-related issues, Apple has trimmed its fiscal first-quarter sales forecast, citing slowdown in iPhone sales in China. Chipmakers’ revenues are also expected to be impacted if China retaliates. Intel Corporation has cut its revenue forecast for 2019, citing lower demand from China.
But, two tech behemoths are less vulnerable to trade-related concerns — Facebook, Inc. FB and Netflix. Mark Mahaney, lead technology analyst at RBC Capital Markets, said that these companies have a low exposure to China at roughly 1% to 2%.
Additionally, Facebook is less pricey when its price-earnings ratio is considered. Netflix, incidentally, keeps producing top-notch original content which should consistently drive revenues. Shares of Facebook and Netflix have advanced at a solid pace so far this year. While Facebook jumped 43.9%, Netflix soared 35.5%. Facebook currently flaunts a Zacks Rank #2 (Buy) while Netflix has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Why Thinking Small is Not the Only Option
In the wake of the present trade scenario, investors seem to be shifting to small-cap stocks. This is because such stocks tend to have higher proportion of domestic sales compared to large-caps. But, in reality, the difference isn’t much. Per data from FactSet Research, small-cap stocks in the Russell 2000 index derive nearly 20.6% of their revenues from outside the United States, while stocks from the broader S&P 500 obtain about 30.3%.
In this context, companies that derive most of their revenues from the United States should remain unaffected. Goldman Sachs chipped in that CSX Corporation CSX rakes in 100% of its sales from the United States. Intuit Inc. INTU is another company that draws 95% of sales from the country, Goldman added. Hence, it’s natural that these companies stand to gain the most from the trade war escalation. After all, their profits aren’t getting eroded due to the limited exposure to foreign markets.
While shares of CSX Corporation have risen 25.8% on a year-to-date basis, Intuit gained 22.6%. Both the companies boast a Zacks Rank #2.
Service Firms Are Big Gainers
Service firms are safe bets for now. Such firms are unperturbed by trade retaliations as they have less foreign sales exposure compared to goods companies. Service stocks also incur lower foreign input costs that might be subject to tariffs. Such input costs mostly related to direct materials, labor and factory overheads.
Some may argue that growth in the service sector, the main component of the U.S. economy, has slowed for the second straight month in April. This is because the ISM nonmanufacturing index was 55.5 in April, compared with 56.1 in March. Let’s admit, the current level is still above 50, indicating expansion. At the same time, job gains in the service sector continued to rise in April, whereas job gains in the manufacturing sector dropped for the third straight month.
Some of the service stocks that should make meaningful additions to your portfolio are Barrett Business Services, Inc. BBSI, Insperity, Inc. NSP, G-III Apparel Group, Ltd GIII, Stifel Financial Corp. SF and Discover Financial Services DFS. All of them have gained more than 25% so far this year and possess a solid Zacks Rank (read more: Trade Tensions Simmer: 5 Service Stocks to Buy Now).
Not So Lucky Ones!
One of the biggest area affected by trade tensions is the U.S. automotive industry. Last year, China had increased tariffs from 15% to 40% on any U.S.-manufactured automobile entering the country. And now, with China contemplating more tariffs, things are surely not looking up for U.S. automakers. General Motors, in particular, projected $1 billion extra costs this year owing to tariffs. Harley-Davidson also cautioned that its tariff-related costs are expected to increase from $23.7 million in 2018 to more than $100 million this year.
What about heavy equipment makers? Caterpillar has claimed that tariffs would cost the company $250 million to $350 million in 2019, while Deere & Co expects U.S. tariffs on Chinese imports to cost around $100 million this year.
Last but not the least, Archer-Daniels-Midland, the processor and seller of agricultural commodities, products, and ingredients, said that trade tensions will disrupt its supply chain and eventually dent earnings.
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