Escalating tariffs and tensions will impact economies – and investments.
There are steps investors can take.
Trade war talk is wagging tongues as President Donald Trump ponders steeper tariffs on Chinese imports than originally proposed. If the administration follows through, a trade war could have broad economic implications, with investors directly affected. “A trade war would be deleterious to the entire global economic backdrop,” says John Traynor, chief investment officer at People’s United Wealth Management in Bridgeport, Connecticut. “In the long run, there are very few winners in a trade war, just those who lose relatively less.” Stocks have been holding steady and there’s no certainty whether – or when – new tariffs will be forthcoming. Investors can prepare for a trade war by considering these seven investments.
Treasury bonds offer security.
The Treasury’s inflation-protected securities can be a haven in a trade war for three reasons, says Scott Kubie, chief investment officer at Carson Group in Omaha. “Tariffs are inflationary because they raise the price of foreign goods and allow domestic producers to increase prices as well,” he says. TIPS offer built-in inflation protection. Furthermore, they benefit from a drop in interest rates which could occur if a trade war slows economic growth. Their Treasury-backed nature also offers protection against increased bankruptcy risk that a trade war can trigger. Kubie cautions that, “if the trade war turns out to be a mere trade spat, then TIPS might lag other investments.”
Think small-cap for big results.
“Small-cap stocks represent companies who tend to derive a larger proportion of their revenues domestically than abroad and thus, are likely to be less impacted by a trade war,” says Joe Smith, senior market strategist at Omaha-based CLS Investments. Small-cap stocks have seen a surge, with the iShares Russell 2000 ETF (ticker: IWM) making a relative gain of 9.3 percent, compared to 4.1 percent for the SPDR S&P 500 ETF Trust (SPY). But, small-cap stocks may not be completely bulletproof in a trade war. “Small-cap stocks are not immune to equity market volatility,” Smith says.
But don’t forgo large-caps completely.
Large-cap companies may experience more volatility during a trade war, but investors shouldn’t ignore them. “At its core, a trade war is meant to make products or components produced in other countries more expensive than their domestic counterparts,” says Josh Blechman, director of capital markets at Exponential ETFs. “Therefore, the companies that will be most affected by this phenomenon are large international companies that manufacture and sell across the globe.” Blechman says the Reserve Cap Weighted Large Cap ETF (RVRS) offers investors less concentrated exposure to S&P 500 index constituents, favoring smaller, domestically focused large-cap companies “more likely to have their products benefit from tariffs placed on international competitors in their space.”
Try tech innovators on for size.
FANG stocks – Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google (GOOG, GOOGL) – still hold appeal in a trade war but smaller tech companies aren’t to be overlooked. Bill Studebaker, president and CIO of ROBO Global, recommends online supermarket Ocado Group. Ocado recently entered a tech-driven partnership with Kroger Co. (KR), which Studebaker says is expected to position Kroger as a true rival to Amazon.com (AMZN). That partnership contributed to a 250 percent increase in Ocado’s stock price over the last 12 months. But don’t put all your eggs in one tech basket during a trade war, Studebaker says, as “true opportunity lies across the entire robotics and artificial intelligence supply chain.”
Get back to basics with commodities.
Commodities may be a defense against the inflationary effects of a trade war. “Commodity prices have historically been highly correlated with inflation, typically acting as a type of leading indicator of inflation,” says Will Rhind, founder and CEO of GraniteShares. “This is because commodity prices may react more quickly to increased demand and decreased supply.” He says investors may want to consider something like the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB), benchmarked to the Bloomberg commodity index. This index offers exposure to 20 commodities. COMB “should provide investors with direct exposure to inflation through rising commodity prices, allowing investors to potentially hedge their portfolios against inflation.”
Invest closer to home.
Domestic stocks can look more attractive as a trade war notches up and certain sectors face less exposure to trade issues. Focusing on health care could be a good move and Traynor recommends UnitedHealth Group (UNH), the dominant health insurer in the U.S. “Last year, revenue grew 9 percent and we expect an additional 10 percent growth in 2018.” If you’re interested in casting the net a little wider, consider funds that invest companies that primarily do business in the U.S., such as the iShares Russell 1000 Pure U.S. Revenue ETF (AMCA). This relatively new ETF includes the health care, financials and consumer discretionary sectors.
Reconsider real estate.
Real estate can take a hit if a trade war brings inflation hikes, but certain sectors may be able to cope better than others. Jordan Farris, head of ETF product and development at Nuveen, says real estate investment trusts, such as the Nushares Short-Term REIT ETF (NURE), can help overcome trade war fears. “NURE is a passively managed ETF tracking an index of hotel REITs, apartment REITs, manufactured home REITs and self-storage REITs. These four segments of the publicly listed REIT market have historically outperformed during periods of rising interest rates and are less impacted by trade than are other areas of the REIT market.”
By Rebecca Lake, Contributor Aug. 3, 2018, at 9:00 a.m.