By CCN: Donald Trump’s trade war with China is on a knife-edge as Chinese Vice Premier Liu He flies to Washington today. The two-day talks were expected to lead to a final deal, but we might get an all-out trade war instead as Trump claims China “broke the deal.”
Investors are nervous. Analysts estimate the Dow and other US indices could fall 10 – 15 percent if the trade deal bombs. Goldman Sachs dived deeper, seeking out a list of Dow stocks that will be hit hardest, including bellwether names like Coca-Cola, Boeing, and Intel.
Hopes for a trade deal were dashed this week as Trump threw out fresh threats to China. The president warned he would increase tariffs from 10 to 25 percent on $200 billion worth of Chinese goods.
It was a shock move as investors expected a trade deal to be inked this week. That move alone wiped out $1.36 trillion from global stock markets as China kicked back with a threat of retaliatory penalties.
On the eve of Liu He’s visit to Washington, Trump stoked fears yet further. In front of a crowd in Florida last night, he said Liu He was a “good man,” but “they broke the deal.” US Trade Representative Robert Lighthizer is now calling members of Congress warning them to prepare for a no deal situation.
In other words, investors need to be wary of a worst-case scenario.
The Dow Jones Industrial Average has already taken a series of huge blows in the wake of Trump’s trade threats. As CCN reported, the DJIA plunged on Tuesday due to negative trade sentiment.
Goldman Sachs analysts, led by chief equity strategist David Kostin, have issued a careful breakdown of nine Dow stocks most at-risk stocks if the trade deals fails:
Goldman also highlighted risky stocks outside the Dow including Pepsico, Philip Morris and chipmaker Nvidia.
They all have one thing in common: they’re “goods” companies rather than services. Kostin explains that goods companies have significantly more exposure to trade deal volatility. Over the last 12 months, goods routinely underperform services when trade tensions rise.
Goldman Sachs also outlined six Dow stocks that would weather a failed trade deal. They are:
Outside the DJIA, Kostin highlighted Netflix, Facebook, Berkshire Hathaway, and US banks (Citigroup, Wells Fargo, and Bank of America).
Kostin likes these stocks in a trade war scenario because they have less exposure to China’s retaliatory threats. They’re also better capitalized and boast stronger growth potential.
“Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-US sales exposure than Goods companies. Services stocks have faster sales and earnings growth, more stable gross margins, and stronger balance sheets. The relative valuation of Services vs. Goods is slightly elevated versus history.”
UBS Chief Investment Officer Mark Haefele has warned that US stock face a possible 15 percent collapse if trade talks break down.
As Chinese delegates land in Washington for last-minute talks, it’s time for traders to brace for a possible no deal outcome.