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US-China Trade Conflict Escalates: How to Invest

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After an impressive bull run in the first four months of this year, it seems volatility is once again ready to rear its ugly face in Wall Street. Trade-related tensions between the United States and China escalated for the first time in 2019 following a tweet by President Trump on May 5, hinting at more tariffs on China. However, the market recovered partially as negotiations are still going.

Notably, trade-related tensions and the Fed's aggressive monetary stance were largely blamed for severe market volatility in 2018 which resulted in Wall Street’s weakest performance in a decade. Although the Fed adopted a dovish stance since the beginning of 2019, trade spat heightened yet again when it was finally moving toward mutual agreement.

Trade Tensions Escalate

On May 5, President tweeted that the U.S. government will increase tariffs from 10% to 25% on $200 billion of Chinese goods effective May 10. Already, $25 billion Chinese exports are facing 25% tariff in the United States. Moreover, Trump also threatened to impose 25% tariff on additional $325 billion of Chinese goods any time soon.

U.S. officials accuse China of “erosion of commitments”  and said China is backtracking on commitments which it made during the negotiation process. U.S. officials are worried of a change in tone of Chinese delegations over the weekend.

U.S. Treasury Secretary Steven Mnuchin blamed China of denying clear commitments on some key trade issues which could completely alter the trade deal. Notably, the trade deal was expected to materialize by the end of this week.

Meanwhile, on May 6, CNBC reported that China hasn't cancelled the next round of negotiations as reported earlier. Chinese vice premier Liu He will lead a short delegation instead of a 100-member strong team to Washington later this week.

Effects of Tariffs

Per the Office of the U.S. Trade Representative, the country imported $539.5 billion of goods from China in 2018. U.S. trade deficit with China was at $419.2 billion last year. Therefore, virtually all Chinese goods will face U.S. tariffs if Trump administration levied duties on all proposed items.

Investment management firm Morgan Stanly estimated a 0.3% drop in Chinese GDP and 8-12% erosion of emerging markets valuation if the United States hiked tariffs. Barclays predicted that new tariffs will hurt 3-5% of Chinese exports and 0.5% of its GDP.

The United States will also bear the brunt of tariffs. China is the largest trading partner of the United States. A weak economy in China, the largest market for high-tech products, will generate headwinds for U.S. technology companies.

Moreover, China plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries. Tariffs will raise the cost of these products making it very difficult for businesses to formulate long-term plans.

How to Invest?

Further delay in forming a trade deal between the two largest trading nations of the world will result in market volatility. The situation can become worse if the tariff war escalates further. Notably, the IMF has reduced its global growth projection primarily owing to the U.S.-China trade spat.

At this juncture, it will be prudent to invest in high-yielding low-beta stocks, with a favorable Zacks Rank to keep one’s portfolio safe from day-to-day market fluctuations. The beta is equal to 1, which means that the stock is as volatile as the market. So, a stock is relatively more volatile if it has beta greater than 1 and less volatile if beta is less than 1. High dividend will give more protection to your portfolio on the market's downslide.

We have narrowed down our search to five such stocks, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

Camden National Corp. provides commercial and consumer banking products and services to consumer, institutional, municipal, non-profit, and commercial customers. It has a beta of 0.80 and a dividend yield of 2.58%. It has expected earnings growth of 10.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 30 days.

Meridian Bancorp Inc. provides financial services to individuals and businesses. It has a beta of 0.53 and a dividend yield of 1.60%. It has expected earnings growth of 18.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 5% over the last 30 days.

Oaktree Capital Group LLC (OAK - Free Report) operates as a global investment management firm that focuses on alternative markets. It has a beta of 0.54 and a dividend yield of 6.03%. It has expected earnings growth of 31.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.3% over the last 30 days.

OP Bancorp (OPBK - Free Report) operates as the bank holding company for Open Bank that provides banking products and services in California. It has a beta of 0.78 and a dividend yield of 1.90%. It has expected earnings growth of 16.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 22.4% over the last 30 days.

SJW Group (SJW - Free Report) engages in the production, purchase, storage, purification, distribution, wholesale and retail sale of water in the United States. It has a beta of 0.06 and a dividend yield of 1.95%. It has expected earnings growth of 29.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 11.4% over the last 60 days.

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