As concerns over a U.S.-China trade war reignite, scores of American companies have been forced to adjust their sales strategies in China and revamp their supply chains. Meanwhile, “other companies have the competitive advantage of being relatively unaffected by the prospect of increased tariffs,” says Goldman Sachs.
Services Stocks Less Vulnerable to Trade War
Stock investors looking for equities that can withstand the trade war may want to consider looking at companies that provide services instead of hard goods. They will be much more resilient and likely to outperform, per Goldman. This list of firms includes McDonald’s Corp. (MCD), Netflix Inc. (NFLX), Comcast Corp. (CMCSA), Walt Disney Co. (DIS), MasterCard Inc. (MA), Visa Inc. (V), UnitedHealth Group Inc. (UNH) and Verizon Communications Inc. (VZ), according to the detailed 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-US sales exposure than Goods companies,” writes Goldman. Also, “services stocks have faster sales and earnings growth, more stable gross margins, and stronger balance sheets.” Analysts add that the relative valuation of companies that provide services, versus those that provide goods, is slightly elevated versus the historical average.
Within the services sector, Goldman prefers companies with strong fundamentals within software, media, entertainment, retail and banking. Top picks include deep-pocketed tech giants such as Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN).
Goldman contrasts this resilient group with sellers of goods, which analysts note are highly vulnerable, including blue chip companies like Apple Inc. (AAPL), Johnson & Johnson (JNJ), PepsiCo Inc. (PEP), Coca-Cola Co. (KO), Abbott Laboratories (ABT), Chevron Corp. (CVX), Boeing Co. (BA) and United Technologies Corp. (UTX).
While the services sector may be more isolated from a trade war-driven shock, any major downturn could take a huge bite out of stock prices across industries.
That being said, some market watchers, including analysts at Morgan Stanley, expect a re-escalation in trade tariffs to be temporary. The investment bank sees the recent events as a potential tactic to speed up an agreement, adding that “market weakness would help bring both sides back together.” Ultimately, however, “any escalation inherently augments uncertainty and further undercuts risk markets, where a Goldilocks outcome was already priced in,” wrote Morgan Stanley in its recent note titled “Tariff Re-escalation a Credible Risk to Markets.”
Source: Yahoo Finance
Trader Georgi Bozhidarov