How Investors Can Win in the Trade War

Is your investment portfolio protected in case the US-China trade war takes a turn for the worse? 

While there is no set way to avoid the widespread effects of the trade war between the two superpowers, here are a few solid proposals from experts in the industry to mull over for the year ahead.  

Invest in services, not products

Investing in service-providing stocks instead of goods-producing ones may provide one way to avoid some of the harmful effects of rising tariffs. A report from Goldman Sachs explains that goods-producing firms are at higher risk of collateral damage due to their exposure to foreign trade. 

“Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-US sales exposure than Goods firms,” Goldman’s analysts report.

Watch out for companies with a domestic focus

Companies that derive most of their revenues and source materials in domestic markets won’t feel the impact of rising tariffs as much as global companies. Raul Elizalde, president of Path Financial in Florida, calls this the "Home Depot (HD) versus Caterpillar (CAT) effect." 

"Since the beginning of the trade war, roughly the beginning of 2018, HD is up more than 20% while CAT is down more than 15%," says Elizalde. Companies with global revenues are expected to report declines in revenues and profits, while companies whose income is predominantly domestic will be much less affected by growing global trade tensions. 

Beware tech stocks

"There are clear winners and clear losers, and unfortunately, based on our practice in IT, we're participating with losers," says Marty Wolf from Martinwolf Global M&A Advisors in Scottsdale, Arizona. The company focuses on advisory services in the technology sector.

In particular, businesses connected to the semiconductor industry have suffered from the trade war, with stock prices zig-zagging as tariff-related announcements made the news. Wolf explains, "The trade war disrupts the supply chains. Supply chains can't be created in the short term, even if companies wanted to."

Commodities and cryptocurrencies offer diversification opportunities

Commodities and, in particular, precious metals such as gold and silver have benefitted from rising trade tensions. As the U.S. administration is pushing the Fed to lower rates, the likelihood of a weakening U.S. dollar increases, which benefits commodities prices. 

Another option would be buying cryptocurrencies, primarily Bitcoin, which have established themselves as an entirely new asset class over the past years. They are mostly uncorrelated to other asset classes and thus provide a tool for portfolio diversification. However, due to high volatility, crypto-investments have their own unique set of risks. 

We have yet to see how far this trade war will fully pan out, especially with consideration to the new tech struggle between the US and China. Keep a sharp eye on the markets and a steady hand over your portfolios as we await further developments.

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