President Donald Trump’s threat to raise tariffs on $200 billion worth of Chinese goods has rattled global stock markets. China’s promise to retaliate has led to even more volatility and uncertainty for investors.
The escalation would mean that American companies that largely operate in China will likely be affected as Chinese tariffs take effect on their products. The tariffs are scheduled to go from 10% to 25% at 12:01 a.m. on Friday.
What’s an investor to do?
Kevin Divney, senior portfolio manager at Russell Investments, says it makes sense to minimize holdings in U.S. goods companies that have more exposure to international trade policies.
“You want to look at services companies and domestic companies,” he said on Yahoo Finance’s “The First Trade.”
“This is not so much about getting cheaper goods in China,” Divney says about the trade negotiations. “The long-term goal here is to get a larger addressable market for U.S. companies.”
Goldman Sachs’ China trade strategy
Market strategists at Goldman Sachs appear to agree with Divney’s approach, should trade talks break down.
According to a Goldman Sachs report, “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-U.S. sales exposure than goods companies.”
The investment firm adds that service stocks “have faster sales and earnings growth, more stable gross margins, and stronger balance sheets.”
If a full-on trade war with China were to erupt, Goldman Sachs says service companies such as Amazon and Google should outperform traditional product sellers like Apple, which slashed its revenue guidance in January, citing slowing iPhone sales in China. (Though Apple has been ramping up its services businesses, including the App Store and Apple Music as it faces challenges selling devices.)
But recently, Apple’s CEO Tim Cook was much more upbeat about China. During a recent earnings call, Cook pointed out that the reduction of the value-added tax in China as well as the "improved trade dialogue" between the U.S. and China helped lift consumer confidence there.
Clearly, even Cook wasn’t banking on trade talks between the world’s two largest economies to fall apart.
Alexis Christoforous is co-host of Yahoo Finance’s The First Trade. Follow her on Twitter @AlexisTVNews.
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