The raging U.S.-China trade war and growing ban on Chinese technology companies and Brexit uncertainty have been creating a lot of noise in the markets, with major U.S. indices down in red in yesterday’s trading.
The global equity markets have been under pressure on premise that U.S.-China trade spat, if not settled amicably, would weigh on global economic growth. Now with U.S. administration’s attention on Chinese surveillance companies, fears are of the situation turning worse before getting any better.
Another source of global economic uncertainty is no clear path to Brexit and Theresa May being forced to step down from her role.
At the domestic level, the Fed’s recent minutes disclosed a no-change to interest rate for some time now.
Thus given a low-interest-rate environment along with volatility from geopolitical tension, investing in stocks from defensive sectors such as real estate and utilities would be a wise move.
Year to date, the Utilities SPDR (XLU) a fund that only invests in utilities that are included on the S&P 500 has gained 14.2%, while the Vanguard Real Estate ETF, which reflects the performance of publicly traded equity REITs and other real estate-related investments, is up 20%. The S&P 500 Index is up 13.7% in the same time frame.
Tariffs Tit for Tat
After imposing a tariff of 10% on $50 billion worth on Chinese exports last year, the Trump administration has expanded its tariff to 25% on $200 billion of Chinese exports in May. There remains the possibility of imposition of 25% tariff on another $325 billion of Chinese goods.
In retaliation to U.S. charges, China had imposed $110 billion tariffs on U.S. exports in 2018. Following the most recent hike of U.S. tariff, the Chinese authority has imposed 25% tariff on an additional $60 billion U.S. goods, effective Jun 1, 2019.
American businesses in China are already wounded by tariffs that have pushed up manufacturing costs and dampened demand for its goods and services.
Action Against Chinese Technology Companies
Last week, the Trump administration barred Huawei Technologies and entered it to the the Entities List, and later offered a 90-day reprieve, thereby prohibiting it to access American technology without a special license.
The United States is now contemplating a similar call on other five Chinese surveillance companies, two of which are Hikvision and Zhejiang Dahua Technology Co. This move arises from the Trump’s administration concern about their use of American technology for espionage.
Fed’s Patient Approach to Monetary Policy
The recently released minutes of the Federal Reserve’s monetary policy meeting (held during Apr 30- May 1), hinted at leaving interest rates unchanged for some time. Though the inflation number came in at 1.6%, which is lower than the Fed’s target range of 2%, it was seen as temporary and not a reason to worry about.
The members highlighted that the country’s expanding economic activity and strength in labor markets fairly accommodates the ‘wait-and-see’ approach for now. The benchmark policy rates stands at 2.25-2.5%.
We note that U.S. GDP grew 3.2% in the first quarter of 2019, exceeding the consensus estimate of 2.1% by a wide margin.
Defensive Sectors to Gain
Given the current low interest rate environment and volatility in equity markets from the U.S.-Sino trade tussle, investing funds in defensive sectors like utilities and REITs makes sense. These sectors also stand to gain from low interest rates, since they run on huge debt, a low interest rate environment is a positive.
We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Geo Group Inc. (GEO - Free Report) has a Zacks Rank #1 (Strong Buy) and is an equity real estate investment trust. It specializes in the design, development, financing and operation of correctional, detention and community reentry facilities.
The company has expected earnings growth of 8.5% for the current year compared with the industry’s decline of 1.4%. The Zacks Consensus Estimate for the current year has improved 14% over the past seven days. You can see the complete list of today's Zacks #1 Rank stocks here.
Middlesex Water Company (MSEX - Free Report) owns a Zacks Rank #1. The company treats, stores and distributes water for residential, commercial, industrial and fire prevention purpose.
Middlesex Water's expected earnings growth for the current year is 10.7% compared with its industry’s growth of 3.7% . The Zacks Consensus Estimate for the current year has gone up by 5.9% over the past 30 days.
Atlantic Power Corporation (AT - Free Report) is a Zacks Rank #1 independent electric power producer that owns interests in a diversified portfolio of independent, non-utility power generation projects.
The company has an expected earnings growth of 50% for the current year compared with its industry’s decline of 0.4%. The Zacks Consensus Estimate for current-year earnings has improved 181% over the past seven days.
City Office REIT, Inc. (CIO - Free Report) is a real estate investment trust, focused on acquiring, owing and operating offices properties in the United States.
The company has expected earnings growth of 11.11% for the current year compared with the industry’s decline of 1.4%. The Zacks Consensus Estimate for current-year earnings has improved 1.7% over the past 30 days.
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