Investors need to be keenly aware of the impact of tariffs on their investments. President Donald Trump is engaged in a tit-for-tat escalation of a trade war with China, with the two countries targeting everything from furniture, appliances, chemical products, food, steel, textiles and industrial parts.
Canada, Mexico and the European Union have also been targeted with tariffs by the Trump administration, which is using the threat of tariffs to rewrite U.S. trade deals. If you’re having difficulty keeping up with the U.S.-China trade tariff competition, it’s no surprise. The current tariff dance is moving fast. Whether and how long the tariffs will last is anyone’s guess.
Is it wise to tweak your strategy because of tariffs? For active investors seeking to capitalize on the tariff frenzy, the simplest response to tariff-influenced investing is to buy the industries or companies that will benefit and sell those that will be harmed. But, you must be nimble to enact these trades as tariffs are a moving target and early movers may capture the greatest profits.
Presently, U.S. producers of semiconductors, chemicals, plastics, motorcycles, furniture and appliances should benefit. Additionally, U.S. produced solar panels and washing machines might also prosper. Yet this strategy of buying U.S. companies that are helped by tariffs remains murky as many manufacturers source inputs from multiple countries. Whereas, investors could sell or short those industries damaged by tariffs on U.S. products like autos and medical equipment. Yet, before enacting trade-related buying and selling, do your homework. As, many of these plays might have already been enacted, leaving scarce profit for new tariffs plays.
There could be long-term impacts to tariffs. An impact of the tariff on imported steel may fundamentally change the construction sector, says Steve Conboy, chairman and general manager of M-Fire Suppression of Carlsbad, California and a 45-year veteran of the construction industry. Builders could shift toward mass timber construction instead of concrete and steel. Should this come to pass, investors in the timber production industries would thrive while those in steel construction-related corners would not, Conboy says. Builders could adapt to the higher costs of imported steel by absorbing the cost or passing it along to buyers. Both scenarios would hurt the shareholders in construction-related stocks and funds, Conboy says.
Reviewing potential tariff-impact scenarios on an industry-by-industry basis highlights the dicey task of picking investments based upon tariffs. “Companies do not make it easy for investors to understand how tariffs will affect their results. It is very complicated to analyze the effects of tariffs because the answer depends on how a company does business,” says Peter Cohan, professor of strategy and entrepreneurship at Babson College in Massachusetts.
For instance, a European company that manufactures cars in South Carolina and exports them to China might be hit twice by tariffs, Cohan says. If it uses Chinese-imported steel in the manufacturing and then pays the U.S.-imposed tariffs when the autos are exported to China, the tariff penalty doubles. The company is then forced to either absorb the costs and reduce its profits or increase costs and potentially lose revenue as the cars become more expensive to Chinese consumers.
Max Gokhman, head of asset allocation at Pacific Life Fund Advisors in Newport Beach, California, says small-cap firms in growth sectors like industrials, technology and consumer discretionary are most vulnerable to tariffs. Gokhman also warns that large multinationals dependent on global trade could also be harmed.
Milton Ezrati, chief economist at Vested, a financial communications firm in New York, believes that the tariffs won’t last. “The White House will face increasing pressure from domestic elements who are suffering because their sourcing has become more expensive or because the retaliations have targeted them,” he says. Trading stocks based on tariff developments is risky. For risk-seeking active investors there may be potential for profits, but setting a sensible asset allocation and adjusting your investments as your risk tolerance shifts is likely the most reasonable course.
In other words, stay on your investment path and don’t try to out maneuver the markets during a trade war.
By: Barbara Friedberg, Contributor