President Trump recently threatened fresh tariffs on Chinese imports, provoking China to the extent that it let the yuan sink and has been labelled as a currency manipulator. Aggravating things, the trade deal is showing no signs of progress, hampering the U.S. economy and even endangering Trump’s re-election.
Given the widespread uncertainty, investors should zero in on stocks that can ride out the ongoing trade tensions.
U.S.-China Trade Tensions Mount
Markets somewhat recovered from a terrible Monday after the Chinese government assured that it would take appropriate measures to check the fall of its currency beyond a mark. China had priced yuan at 6.9683 to the U.S. dollar, which is the weakest in almost 11 years. Investors, in fact, were concerned that China would price the yuan below the psychological barrier of 7:1.
Nonetheless, China let its currency value decline in order to make some Chinese goods cheaper and negate the effects of the U.S. tariffs. Meanwhile, Trump accused China of being a currency manipulator. Trump has pledged to levy 10% tariffs on $300 billion worth of Chinese goods beginning Sep 1, while China retaliated by suspending purchases of American farm crops.
But, is it good for the U.S. economy? Certainly not! This time the duties will affect consumer goods, particularly televisions and mobile phones, and not just components used in manufacturing process. Capital as well as intermediate goods are also expected to bear the brunt of tariffs, per the Goldman Sachs (GS - Free Report) .
Gregory Daco, chief U.S. economist of Oxford Economics, added that an existing 25% tariff on $250 billion of Chinese imports coupled with tariffs on steel and aluminum will certainly dent economic expansion by 0.3% next year.
And the proposed tariffs on $300 billion Chinese shipments would further impede growth by another 0.1%. What’s more, if the trade war escalates beyond that, with more tariffs on European auto imports, then a recession is on the anvil.
Nobel Prize winning economist, Paul Krugman, noted that tariffs on Chinese goods are now back to levels seen during pre-1930s protectionism period. He warned that the “the trade war is reaching the point where it becomes a significant drag on the U.S. economy.”
But, White House’s trade tussle with Beijing will likely to drag onto the presidential election in 2020. Unfortunately, trade war has done no good to the United States, with the country running into huge trade deficits with China, including a $419-billion shortfall of goods last year.
How to Play This Trade Ambiguity?
As uncertainty over the outcome of the Sino-American trade deal rises, investors should target tariff-proof stocks that stand to gain from an all-out trade war.
Service firms are safe bets because such firms are unperturbed by trade tensions as they have less foreign sales exposure compared to goods companies. Service stocks also have less foreign input costs that might be subject to tariffs. Such input costs mostly include direct materials, labor and factory overheads.
And the best service firm, no doubt, is Microsoft Corporation (MSFT - Free Report) . The company, currently, has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has climbed 2.2% over the past 60 days. The company’s expected earnings growth for the current year is 9.7%, higher than the Computer - Software industry’s projected rally of 5.3%. The stock has already surpassed the broader industry so far this year (+32.6% vs +25.1%).
As markets seem to be plagued by widespread uncertainty, defensive stocks like utilities are gaining as they seem to be the safest investment option. And why not? Utility stocks are generally non-cyclical or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand, irrespective of market volatility. Moreover, utilities are deemed defensive stocks as electricity, gas and water are essentials.
Prominent among utility players are Southwest Gas Holdings, Inc. (SWX - Free Report) , Alliant Energy Corporation (LNT - Free Report) and Unitil Corporation (UTL - Free Report) . Southwest Gas purchases, distributes, and transports natural gas in Arizona, Nevada, and California. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 0.5% in the past 90 days. The stock’s expected earnings growth rate for the current year is 6.5% versus the Utility - Gas Distribution industry’s estimated decline of 1.5%.
Alliant Energy operates as a utility holding company that provides regulated electricity and natural gas services in the Midwest region of the United States. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 0.4% in the past 60 days. The stock’s expected earnings growth rate for the current year is 3.7% versus the Utility - Electric Power industry’s estimated rally of 0.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Unitil engages in the distribution of electricity and natural gas in the United States. It has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 0.8% in the past 60 days. The stock’s expected earnings growth rate for the current year is 4.1% versus the Utility - Electric Power industry’s projected rally of 0.8%.
In fact, shares of Southwest Gas, Alliant Energy and Unitil have gained 15.5%, 19.4% and 14.1%, respectively, so far this year. Take a look —
Gold futures, in the meantime, rallied above $1,500 an ounce on the Comex, the highest level since 2013. This is because prices for gold, perceived as safe havens increased as U.S.-China spar over trade.
Notably, a gold mining company that has been doing well of late is AngloGold Ashanti Limited (AU - Free Report) . The company, currently, has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 10.9% north over the past 60 days. The stock’s expected earnings growth rate for the current year is 111.3%, way more than the Mining - Gold industry’s projected rally of 10.2%. The company has outperformed the broader industry on a year-to-date basis (+64.7% vs +40.7%).
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