A trade war is in full swing. While the US finally closed an updated trade deal with Mexico and Canada this weekend, the big battle with China is still revving up. Both sides have raised tariffs considerably in recent weeks and have canceled various negotiations and meetings. With that in mind, Goldman has put out a list of stocks they say will perform well in the ongoing trade battle. Overall, Goldman says shares with high and stable margins are in the best position to pass along cost pressures, which means they are the best bet for investors. “Companies with high pricing power are well-positioned to pass through input cost pressure to consumers, preserving high margins … The market typically rewards companies with high margins when the outlook for corporate profitability worsens”, says the bank. Some of the stocks listed include Autozone, Adobe, Coca-Cola, VeriSign, Ralph Lauren, and Expedia, among a total list of 33 companies.
FINSUM: We like the approach and diversity of this list of shares. We do think a commanding market position will be key to maintaining margins, so agree with Goldman’s view here.
On the surface, the US seems to have a major upper hand in its trade war with China. Simply put, they export a lot more to the US than we do to China, which means that they have more to lose than we. However, looking closer at the imposition of the US’ attest tariffs, a significant weak spot emerges. That weak spot is that the US has become overly reliant on some very niche but important Chinese exports. Mot of these are things people have never heard of, like carbonate esters and fluorine salts, both used for electric car batteries. Nonetheless though, they are very important, and 297 such imports were recently exempted from the US tariffs.
FINSUM: Barite (for oil and gas exploration) and Ibuprofen, are other crucial imports. This is one of the pressure points where China could simply cutoff supply and the US would be in a difficult position.
Many investors are simply unfazed by the current trade war erupting between the US and China (just look at share prices for evidence). However, even those who may be bullish on equities need to be worried for oil. While the increasing sanctions on Iran are supportive of prices, a trade war would likely be very bad. The reason why is that increasing tariffs would likely cause an economic downturn in emerging markets, which would then heavily sap oil demand, leading prices lower.
FINSUM: The oil and other commodity markets are demand-driven (and realistic) in a way that stocks aren’t. Watch them for where the economy is actually headed.
One of the many factors that has been odd about the market’s rise since the beginning of summer has been how it did so at the same time as global trade tension was building. No better example of this odd pairing can be found than yesterday’s market—Trump imposed tariffs on $200 bn of extra Chinese goods, and the Dow rose over 0.5%. Why is this the case? Barron’s argues that it is because investors fundamentally believe that China and the US won’t let a trade war get out of control because of fears of mutually assured economic destruction. Accordingly, they see almost all negotiations and actions through rose-colored glasses.
FINSUM: We are not as sanguine as the market about the risks of the current trade war. Our biggest worry is not even about trade negotiations, per say, it is more about the ill will that is being built up which may create a future impasse on a seemingly resolvable issue.
President Trump has just ordered $200 bn of further tariffs to be applied to Chinese goods. The Chinese have responded strongly, vowing to retaliate to the measures. The Chinese government said “We have been stressing that talks need to happen on the basis of parity, equality and good faith … What the US has done shows no sincerity and good faith at all”. The Chinese says they will impose tariffs on $110 bn of US goods, or about 85% of all US imports to the country.
FINSUM: These tariffs come just before the US and China were set to hold another round of trade talks. We have no idea how those are progressing, but this is really going to anger the Chinese.