Tariff talk is blanketing the news, and the latest tariff tit for tat raises questions about whether a trade war with China is in the making.
Tensions began rising in March, when President Donald Trump announced tariffs on steel, aluminum and intellectual property imports to the U.S. and China retaliated with tariffs on 128 American goods. The U.S. fought back, threatening a 25 percent tariff on $50 billion in Chinese imports, including semiconductors, electric vehicles and medical products. Then in early April, in retaliation to more Chinese tariffs on American products, Trump threatened to slap another tariff on $100 billion in imports from China.
The threats have been shaking up the market, with stocks down 3.9 percent in February and falling 2.7 percent in March, but experts say we’re not in a full-blown trade war — yet. In fact, it’s still unclear which tariff proposals will become a reality.
[See: 8 Times When You Should Sell a Stock.]
Nevertheless, John Bogle, founder of the Vanguard Funds, says that in his 66 years in the investing business, he’s never seen markets this volatile. Although the volatility may be making some investors queasy, there are ways to profit from trade war jitters through specific stocks, sectors or strategies. Every trade war produces a mix of the victorious and the vanquished, and both groups offer investing opportunities.
Playing off the trade war winners. Naturally, the biggest winners from a Trump trade war are likely to include some of the very same industries the president’s tariffs aim to protect.
The U.S. steel, robotics and energy industries should be winners, says Arthur Dong, a professor at Georgetown University’s McDonough School of Business. He believes the demand for high-strength steel will remain strong as more companies produce electric cars. The exchange-traded fund VanEck Vectors Steel (ticker: SLX) tracks the NYSE Arca Steel index, exposing investors to companies of all sizes and nationalities that produce steel products or mine and process iron ore. Some of the fund’s holdings include Rio Tinto ( RIO), Vale ( VALE) and United States Steel Corp ( X). The VanEck fund currently yields 2.27 percent and has a reasonable 0.55 percent expense ratio.
Another supporter of steel is Ben Phillips, chief investment officer of EventShares, an asset management firm that actively manages ETFs to capitalize on U.S. government policies. Phillips also likes solar. In January, Trump imposed tariffs on solar panels, with U.S. solar panel makers emerging as trade war winners. “The most successful stocks for tariffs and trade for EventShares have been U.S. Steel and First Solar (FSLR) on steel and solar tariffs, respectively,” Phillips says.
Individual stock pickers will find United States Steel has a favorable valuation, with a forward price-earnings ratio of 7.1. Down from a 52-week high of $47.64, the stock currently trades close to $34, with projected 2018 earnings-per-share growth of 136 percent. As the only solar panel company with a large U.S. manufacturing presence, First Solar trades $70, despite a falling market share that hurt the company’s business last year. But keep it on you radar, as earnings growth is expected to turn around next year.
A third industry on Trump’s targeted tariff’s list are products used for robotics and automation. “Companies that focus on robotics, automation and advance machines should be watched closely” for opportunities, Dong says. The tariffs will help non-Chineses companies in those industries.
One way to play the robotics angle is the Robo Global Robotics & Automation Index ETF ( ROBO). Top holdings include Taiwanese industrial robot maker Hiwin Technologies Corp., Japanese automation specialist Omron Corp. and U.S. companies Zebra Technologies Corp. ( ZBRA) and iRobot Corp. ( IRBT). The fund’s methodology favors U.S. based companies.
[See: Artificial Intelligence Stocks: The 10 Best AI Companies.]
Phillips is not a fan of protectionist policies and believes they will hurt stock valuations and market sentiment. He thinks investors may want to adopt a more protective stance against the tariffs and says that “positions in more defensive industries would likely do better — utilities, high-quality real estate investment trusts, consumer staples, health care and telecom.”
For exposure to these industries, investors should consider sector ETFs such as Vanguard Real Estate( VNQ), iShares U.S. Consumer Goods ( IYK), Health Care Select Sector SPDR ( XLV), and iShares U.S. Telecommunications (IYZ).
Steve Massocca, managing director of Wedbush Securities, believes the Trump administration is using the threat of tariffs to draw countries to the negotiating table to improve bilateral agreements, a sentiment echoed by Larry Kudlow, director of the National Economic Council, who publicly suggested that proposed tariffs against China could be a negotiating tactic.
If bilateral trade agreements fail “and tariffs are indeed implemented, then that will be detrimental to the overall economy but helpful to those few that are the direct beneficiaries of reduced competition,” such as the steel, aluminum, intellectual properties and solar industries, Massocca says.
Profiting from trade war losers. Should the overall economy suffer from the Trump tariff policy, there are strategies to play the market downturn. “One way investors could benefit is tactically shorting stocks,” Phillips says.
Short selling is the reverse of investing. Instead of buying a stock and selling it after a price increase, you borrow a stock or fund (through your broker) and immediately sell it. If and when the stock price drops, you buy it and return the borrowed shares, thereby profiting from the price decline.
Shorting stocks is a speculative tactic and not one for risk-averse or inexperienced investors. If the asset you’re shorting doesn’t decline and increases instead, you’ll lose money as you cover the short, which will require buying the asset at a higher price instead. Aggressive investors, though, might consider tactical shorting or selling short companies or sectors that are targeted by Chinese import tariffs.
Farmers, for example, are in dire straights if China goes through with its tariffs on $50 billion of U.S. goods, including agricultural products. The U.S. is a huge exporter of beef, pork, soybeans and fruit, making funds and companies in agriculture-related businesses potential candidates to short.
The VanEck Vectors Agribusiness ETF ( MOO), for example, includes a broad spectrum of agricultural businesses, including chemicals, seeds and farming equipment as well as food production. Some of the fund’s biggest holdings are Monsanto Co. ( MON), Deere & Co. ( DE), Archer Daniels Midland Co. ( ADM) and Tyson Foods ( TSN).
For more specific shorting targets, China’s import tariffs will hit meat products companies Tyson Foods and Hormel Foods Corp. ( HRL) hard. Tyson is already showing signs of weakness, recently trading at $70.11, down from a high of $82.86 in January, while Hormel recently traded at $34.93, near the middle of its 52-week range. If China follows through with its threatened tariffs, profits for agribusinesses will fall, leading to lower stock prices. The challenge for investors selling short these stocks is determining if and when their prices will drop.
[See: The Fastest Ways to Lose Money in the Stock Market.]
But a trade war could threaten all U.S. stocks. U.S. stock futures, considered a barometer of future stock prices, fell last week because of concerns that a trade war would hurt economic growth and the earnings prospects of U.S. companies. If the U.S. stock market tumbles, shorting the SPDR S&P 500 ETF ( SPY), which tracks the Standard & Poor’s 500 stock index, is another way to benefit from the decline.
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This Is How to Profit From a Trade War originally appeared on usnews.com
