Market Pulse: Trade war and its impact on US industry sectors

In the next turn of the saga, Donald Trump announced to impose a new tariff on USD 300b of Chinese goods, leading to a further escalation of the trade war between Washington and Beijing.
Eighteen months into the trade war the real-world impacts are already felt across the globe. The US economy, which the trade war was supposed to protect, looks as if it is likely to be the worst affected, with some forecasters suggesting that as much as 1% could be knocked off economic growth in the coming years. On a smaller scale, companies and whole industries are already starting to feel the pain from the US tariffs, which have raised the price of sending a whole range of goods to the US, increasing costs for the very companies they were originally intended to protect. Some of the major businesses and industries have blamed the president’s trade war for a negative impact on their situation. For now, the trade war is shrinking global trade.
US President Trump’s latest actions have increased the risk of a full-blown trade war between the two countries. It is likely that some industries will be hit harder than others. Below, we highlight the sectors that are the most vulnerable ones.

Agriculture

Perhaps one of the most striking consequences of the trade war is what is happening to some farmers in the US. For many agricultural goods, particularly soybeans, China is the largest export market for US farmers. That is changing due to Trump’s tariffs, with Chinese importers looking elsewhere for a cheaper supply. China last year accounted for about 60% of US soybean exports, but such is the lack of demand that many farmers are forced to abandon crops. If China slows down or stops its purchases of US agricultural products again, farmers and related industries will likely feel the pressure and suffer.

Manufacturing

Much of Trump’s reasoning behind the trade war is to reinvigorate the US manufacturing sector, which he said has been suffering from decades of cheaper production in Asia, particularly in China. Early signs, however, suggest the tariffs are doing the opposite and are actively hurting manufacturers. Manufacturing activity in the US has slowed already, with industry figures citing future protectionism and widespread uncertainty as major reasons for the slowdown.

Automobiles

One of the most critical areas affected by trade tensions is the US automotive industry. Last year China increased tariffs on US automobiles entering the country from 15% to 40% in retaliation. While Chinese consumers mostly buy locally manufactured vehicles, US automakers, are hurt badly by the trade tensions. China also lies at the heart of the complicated global automotive supply chain, which means US producers spend more on parts from China as they are taxed at a higher rate.

Technology

Chipmakers and electronics manufacturers, whose sales are highly dependent from China, are especially vulnerable in a trade war. Apple has been able to avoid tariffs on its China-assembled phones so far, but that will change if Trump imposes tariffs on all Chinese imports as he is threatening now. The trade war has already had an impact on the iPhone maker’s earnings since it adversely affected the domestic demand in China. On the other hand, names like Amazon, Netflix, and Alphabet are not likely to suffer from trade dispute as their businesses are driven by consumers seeking entertainment value, convenience, competitive prices, and a broad range of information.

How else to invest?

If a full-blown trade war broke out, we suggest focussing on domestically oriented stocks with strong fundamentals and low betas – which indicates a lower sensitivity to GDP changes. Especially companies across defensive industries including real estate, financials and utilities have the potential to outperform the broad US equity market in such a scenario. Furthermore, we favour service-oriented companies as opposed to companies that focus on selling goods. Commodities can also be used to hedge against two of the three expected outcomes from a trade war, namely higher prices and a weaker dollar.