Later this week, on June 28th, to be precise, the 2019 G20 summit will kick-off in Osaka, Japan. And while there is any number of items on that agenda, the most anticipated sub-event will be the potential meeting between President Trump and his Chinese counterpart Xi Jinping. With so much negativity built up ahead of that much-touted meeting – tariffs and counter tariffs, blacklists and counter-blacklists – it’s hard to say where the chips may fall.
So, what do you do with your portfolio so that you aren’t swept up in this political bun fight? Well, we have just the suggestions for you. Read on and position your portfolio to defy whatever the outcome.
BACKDROP TO PORTFOLIO MOVES
Before we get down to specifics, let’s dig deeper into the macro picture.
All one needs to do to see the real picture is to take a look at Dollar-Yuan parity graph over the past year. While a strong dollar (viz. the Yuan) might be hurting some segments of the U.S. economy, it’s a positive impact on other parts of the economy can’t be ignored. So, what’s the bottom line here – the trade war, tariffs, and blacklisting and all?
According to research from MGM research, based on data provided by the International Monetary Fund (IMF), the U.S. economy clearly has the upper hand. And although that competitive edge has been decreasing over time ever since 2006, China still has a long way to go before it catches up to the U.S.
China VS. U.S. GDP Growth Rate Comparisons: Source: Trading Economics
But what about trends? What do the numbers – especially over the past 6-months or so – tell us about what to expect in the coming months? Well, there’s a clear divergence between the GDPs of the two largest economies of the world. It’s true, China has enjoyed high to mid-single-digit growth rates (compared to the U.S’s low single-digit rates) for a while now but, as the graphs show, the overall trends are declining for China but trending positively for the U.S.
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The bottom line: The current state of tensions between the U.S. and China is more disadvantageous to the Chinese economy than it is to that of the U.S. So, as long as this state of affairs prevails, portfolios that are tilted towards the U.S. are likely to fare much better than those that are betting on a China recovery thesis.
Given the economic backdrop that we’ve just explored, we believe that the best way to benefit from the prevailing economic undercurrents is to build a portfolio of names that are strongly leveraged to the strongest indicator of the U.S. economy. So, what exactly does that mean? Well: It’s jobs!
The U.S. unemployment rate has been the lowest in decades, which means any companies that benefit directly from that trend are worth adding to your portfolio.
Our U.S. economy-leveraged picks include:
While the FANG stocks, Financials, Retailers and even Consumer discretionary stocks have been badly punished over the past 6-months or so – primarily as a result of ongoing trade tensions – our picks here have performed exceptionally well. That’s because they’re anchored to a part of the U.S. economy that’s been a clear winner – anything to do with hiring, jobs and job creation!
Well, think of them as portfolio “insurance”. These are some of the top Chinese internet giants, with TCEHY being the “Facebook of China”, JD being the “Amazon of China” and BABA being the leader (in China and globally) in B2C, C2C, and B2B transactions. Do you see where the hedging strategy comes in?
Well, these three are strongly leveraged to the Chinese economy, which isn’t in recession mode yet. And despite the fact that the U.S. tariffs and sanctions are hurting China, these companies get a significant portion of their revenue – anything between 60% to 85% plus! – from within China. So, global sanctions will likely not dampen their profitability.
Regardless of what happens at the G20 summit between the two presidents, all of the eight names listed here will most probably continue chugging along nicely!
Of course, one can’t rule out what one can’t see! For instance, there doesn’t seem to be any risk of a global recession on the horizon. However, things could materialize out of left field and send up back to 2009!
If the meeting at G20 doesn’t go their way, China might decide to up the ante and slap more counter tariffs or blacklist more names – Apple and FedEx might start the ball rolling. That could prompt retaliatory measures from the U.S., which could start a vicious cycle of events!
With tensions boiling in the Middle East, all it takes is one small miscalculation to set that powder keg on fire. And then – there’s Brexit that will likely come to a head in the next 3-4 months. Depending on what kind of deal is reached, it could have ripple effects across Europe – with North American contagion a possibility.
Having said all that, one can only factor so much into portfolio building strategies. The best you can do is position yourself to benefit from current (and near future) macro trends, but react quickly when things change. All these names are fairly liquid, and trade on U.S. exchanges. So, if you need to bail out in a hurry, you can easily do that too!
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The author does not own any of the stocks discussed in this article.
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