Stocks to buy and stocks to avoid in a trade war

Equity markets have been jittery recently as trade war threats continue. Most recently we are seeing tensions between the US and Turkey. However, there are still gains to be made on the Australian stock market despite these conflicts.  This trade war may create an opportunity for some Australian companies to become more attractive if their competitors are now faced with tariffs. These are the stocks to buy and stocks to avoid in a trade war environment.

1.Earnings in US dollars

A trade war will strengthen the US dollar as investors put their money in safe havens such as US government bonds.

Investors should invest in businesses that earn cash in US currency but are not affected by the trade tariffs. An example is:

Bluescope – The company was exempted from the tariffs imposed on steel imports and the company also obtains 30% of their earnings from a US based steel producer.

2.Buy US dollars

As mentioned above, investors are putting their money in safe havens such as the greenback after fears of a trade war ignited. Investors can purchase ETFs which are long the US dollar such as “YANK” on the ASX. Bonds and gold have been sold off but the US dollar has become more popular. Investors have been bullish on the American economy as figures indicate strong job gains, lower unemployment levels and higher household spending.

3.Avoid Australian big miners

If the US and China become entailed in a trade war, then demand for these Australian miners may decrease. Once the US decreases their intake of steel from China then this may impact the level of iron ore China needs from Australian miners. These tariffs also create uncertainty with these Australian miners and future projects are suspended as a consequence. Iron ore demand may decrease in demand if there is a slowdown in the Chinese economic growth.

4.Buy Small Caps

Investors should think about investing in small cap stocks as these companies have less exposure to international trade. Large cap companies tend to be more complex and may be affected by trade wars. Small cap companies are typically domestically focused and therefore their revenue is not affected by tariffs. Periods of rising rate environments are the best economic condition for small caps to outperform large caps.

5.Buy Agricultural stocks

China has placed tariffs on US commodities such as soybean. Pork is heavily consumed in the Chinese diet and farmers use soybeans to feed pigs. China consumes about two-thirds of global soybean production. Australian agricultural businesses could potentially benefit from the trade war as tariffs on US products will make these more expensive to the Chinese consumers. Hence demand for Australian produce may increase as the Chinese look for other non-US suppliers. The beef sector is another area where Australia could benefit as American producers have been imposed the 25 per cent tariff on their products making Australian producers more attractive. Other Australian agricultural industries such as fruit and seeds may also benefit from this trade war.

6.Buy Australian Wine Stocks

A 15% tariff has been imposed on US wines. This will make Australian wine more attractive compared to US wine. Wine consumption in the China is growing and it is forecasted to account for 25.1% of export demand.  This demand is expected to increase as a result from the tariffs imposed on US products.

7.Avoid Tourism Stocks

If there is an economic downturn as a result of the trade war, tourism in Australia may suffer as the consumer confidence is weaken in China and the US.

Lauren Hua is a private client adviser at Fairmont Equities.

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