It’s extremely hard to tune into the media these days, either print, broadcast or online, and not hear about the great wall of worries that the Sino-U.S. trade deal is posing for investors. Just a few weeks ago it seemed like a deal was imminent – and then it all fell to pieces. Previous optimism on the “China situation” had spurred many of the stock indices up, delighting investors. But to the horror of many portfolio managers, pessimism soon eroded those gains!
Risk-averse investors could easily be forgiven for wanting to pull out of the stock market and stay in the sidelines until this whole thing clears. But that would be a huge mistake – like those that did just that in late December last year have undoubtedly found. The challenge, however, is how to stay invested but yet manage to eke out decent portfolio returns?
A look at the performance of various indices tells us the story. Looking at the SPDR S&P 500 ETF Trust (SPY), the SPDR Gold Trust (GLD) the Energy Select Sector SPDR (XLE) and the Financial Select Sector SPDR Fund (XLF), we see them either flat or in negative over the past one month. From technology and agriculture to commodities and financials – almost every sector that has China exposure is sure to experience enormous ups and downs as the “negotiations” drag on. And if the status quo lasts for too long – through the fall, for instance – your portfolio exposure to those sectors is sure to result in year-end negative returns.
Well, even though it may seem dismal from everything we’ve said, all may not be lost – just yet! There are still opportunities for investors to tap into. Piggy-backing on some of those opportunities could very well let portfolio builders continue to ride the great wall of China worries higher.
One place where investors might still find some solace is retail. Even as news about the “tapped out consumer” float around, there are names in the consumer/retail sector that are performing relatively better than others.
To leverage some of those performance opportunities, you want to build your portfolio with names that have been holding up relatively well in the face of the great wall of China worries.
Names like Costco Wholesale Corporation (COST) and Walmart Inc (WMT) (and until recently Lowe’s Companies, Inc. (LOW)) have either outperformed the broader index, the SPDR S&P Retail (XRT) or held up relatively well in comparison. In fact, COST has defied all prevailing “consumer fatigue” and “retailer weariness” fears and even outperformed the broader S&P 500 – as represented by SPY.
That’s because, even though these names do have China exposure (the source a some of their finished/semi-finished goods from there), they have two things that other companies might not have:
a) Pricing power – Giants like WMT have already made it clear that any price hikes that might come their way as a result of China tariffs, will be pushed back onto customers. This means investors in such stocks can rest assured that margin erosions will not take place as a result of “China worries”
b) The ability to diversify away from China (and into cheaper markets like Indonesia, Vietnam, Bangladesh, Taiwan, and Thailand).
As is indicated by the chart here, over a 4-month period, since both sides in the trade war ratcheted up the pressure, while the broader retail index (XRT) has lagged, most of the individual names mentioned here have held up pretty well. And even though the trend lines (blue) aren’t technically accurate, they do illustrate the broad trajectories of price movement in each of the names covered here.
As with any strategy, there are risks associated with this play. For instance, if there is an indirect (non-China-related) shock to the global economy – unexpected Brexit fallout, the backlash from the recent Euro election results, tensions in the Middle East – the names discussed here could also be dragged down in the mix. Additionally, if the U.S. administrations broader tariff hikes kick in, or if China does decide to retaliate even more strongly than they have until now (action against Boeing or Apple, banning the export of Rare Earth), that could further cloud our analysis.
The author does not have an investment in stock discussed in this article.