The escalating U.S.-China trade war has sent dividend-rich sectors such as utilities higher, but investors don’t need to get all defensive just yet, according to strategists who say there are plenty of growth stocks with some insulation from China.
Some investors are seeking safety in domestic U.S. growth stocks ranging from software and online advertising to aerospace and recruitment since President Donald Trump’s May 5 tweets showed that U.S. talks with China were in trouble.
While the prospect of a prolonged trade war has shaken the market, investors are also trying to protect themselves from the risk that they could miss out on gains in the event that the United States and China reach a surprise agreement.
Because of the difficulty handicapping the chance of a U.S.-China deal, John Praveen – portfolio manager at QMA in Newark, N.J. – said he would not “completely sell out” of stocks. But he said: “If I was 5-per-cent overweight stocks, I might reduce it to 3 per cent and see if I could reduce exposure to semiconductors and technology.”
“If you’re looking to avoid the pure dividend play and avoid the China trade narrative, you have to look at stocks that are a pure play on the U.S. economy,” said Peter Kenny, founder of Kenny’s Commentary LLC in New York.
Broadly speaking, investors have been raising their defences. While the S&P has fallen roughly 4 per cent since Mr. Trump announced his plan to raise tariffs on Chinese goods in early May, utilities – a low-growth sector with reliably high dividends – has risen more than 2 per cent.
But growth-hungry investors are seeking more nimble companies with little exposure to overseas sales or Chinese imports even in the beaten down technology sector, where semiconductor stocks have lead the recent declines.
Online advertising platforms and cloud software are two tech segments that would not be directly affected by China tariffs, according to Daniel Morgan, portfolio manager at Synovus Trust in Atlanta.
In online advertising, Mr. Morgan favours Twitter Inc., Facebook Inc. and Snap Inc. over Google parent Alphabet Inc., which suspended business with China’s Huawei last week as a result of the trade battle.
He also likes software providers such as Salesforce.com, which derives 70 per cent of its revenue from the Americas and only 10 per cent from Asia-Pacific. However, Salesforce.com has fallen more than 5 per cent since the Trump tweets.
Another option is Workday Inc., which has risen about 4 per cent since May 5 and derives 75 per cent of its revenue from the United States.
Steve Lipper, senior investment strategist at Royce & Associates, favours U.S.-facing companies offering services such as recruiting and merger advice due to a strong U.S. labour market and solid merger activity.
But while U.S.-facing recruitment firms such as Kforce Inc. and ASGN Inc. may not be hurt directly by the trade war, Robert W. Baird analyst Mark Marcon says that they would suffer if tariffs caused the economy to weaken.
Instead, Mr. Marcon favors domestic payroll software companies such as Automatic Data Processing Inc. and Paychex Inc., which tend to do better than recruiters in a downturn. But even if their fundamentals remain strong, payroll companies such as Paycom Software Inc. and Paylocity Holding Corp. could be vulnerable in a sell-off because of relatively high valuations, Mr. Marcon said.
In industrials, a sector with heavy exposure to China, Burns McKinney – a portfolio manager at Allianz Global Investors in Dallas – likes defence stocks such as Raytheon Co. and Lockheed Martin Corp., which could benefit if U.S.-Iran hostilities keep intensifying.
Since sectors such as utilities have risen so much, Royce’s Mr. Lipper is favouring less obvious safe choices.
“Be wary when the consensus view is already reflected in valuations,” said Mr. Lipper, but he added: “The U.S. economy is so diverse that there are always areas that are insulated from whatever you have a concern about.”