Tariff Talk & Portfolio Positioning

Insights

Tariff Talk & Portfolio Positioning

QS RESEARCH GROUP

MARCH 23, 2018

Key Takeaways


  • We hold a neutral short-term view on stocks relative to bonds; a decline in global trade activity due to US-China trade tariffs could further dampen our view on stocks.
  • However, the impact of a potential trade war with China will not be uniform across geographies, sectors and themes within equity markets – investors should be selective in their equity allocations.
  • We expect defensive equity income stocks (stocks that exhibit lower volatility than the market and offer sustainable dividends) to outperform when markets are volatile, as sustainable dividends become a larger contributor to total returns in a low growth market environment

While we entered 2018 with a positive outlook for equity markets and global economic growth, several risks were already apparent early on. These risks include valuations, which continue to be well above historical means; the economic expansion in the US reaching its later stages; rising interest rates as developed central banks tighten their monetary policy; and political uncertainty, both domestically (budget gridlock) as well geopolitically (US trade policy).

Concerns about US trade policy materialized yesterday with the US President’s announcement of new tariffs on a wide range of Chinese consumer products and China’s response in kind, further inciting “trade wars” fears. Equity markets sold-off on the news, as expected. The most direct impact of trade tariffs will likely be a slowing down of global trade activity, with negative consequences on global economic growth. Global trade is a core component of our index measuring leading economic indicators, which in turn informs our global stocks versus bonds decision. QS currently holds a neutral short term view on stocks relative to bonds, so a decline in global trade activity could further dampen our view. In addition, yesterday’s news, and potential for escalation of this conflict, increased uncertainty in financial markets, causing a spike in volatility and the decline in major equity indices and other risk assets. Rising volatility often presents a challenging environment for high yield bonds; should market volatility continue to increase, it could further strengthen our preference for US investment grade bonds over US high yield bonds. However, the impact of a potential trade war with China will not be uniform across geographies, sectors and themes within equity markets. For example, we expect companies in cyclical sectors (such as technology and industrials) to suffer the brunt of the impact, we expect stocks deriving a large portion of their revenue from abroad the US to suffer more than domestically oriented companies, and we expect more volatile stocks to underperform stocks with more stable price and earnings.

Such market environments call for equity investors to be more selective in their equity allocations. Positioning for uncertainty and potential opportunities in a lower economic growth environment requires moving away from broad equity exposure and into a more focused and targeted approach. We expect defensive equity income stocks (stocks that exhibit lower volatility than the market and offer sustainable dividends) to outperform when markets are volatile, as sustainable dividends become a larger contributor to total returns in a low growth market environment. With higher exposure to non-cyclical sectors, such as utilities and REITs, we expect defensive equity income stocks to suffer less of an impact from yesterday’s tariff announcements.

IMPORTANT INFORMATION:
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.
The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. Investments are subject to risks, including possible loss of principal amount invested.
QSCR 18082 (March 2018)