TD Ameritrade: Biotech Could Be Tariff Proof

June 25, 2018 — 10:10 AM EDT

Biotech stocks may be under pressure in recent trading, but the group has been holding up relatively well this year as talk of trade wars ramps up, in part because of the sector's insulation to tariffs.

According to J.J. Kinahan, the chief market strategist at TD Ameritrade, unlike other industries that could take a hit from President Donald Trump's tariffs, biotech companies may be protected because of the nature of the products they develop. "They're hard to duplicate with something local if they're suddenly unavailable," said Kinahan in a recent blog post.

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But it's not just perceived insulation from trade wars that could be lifting the group. According to the TD Ameritrade Holding Corporation (AMTD) strategist, the biotech sector could be benefiting from a more positive environment for mergers and acquisitions given tax reform that lowered the corporate tax rate to 29% from 35%. That overhaul of the tax code, said Kinahan, could prompt large pharmaceutical companies to make buys of biotechs. "The strong economy and continued pressure on big pharma to replenish its pipelines also could be playing into hopes for more biotech M&A in the second half," wrote Kinahan. "Over the last month, the Nasdaq Biotechnology Index (NBI) rose more than 5%, about the same as its year-to-date performance."

While biotechs could benefit from increasing M&A and a flight to safe havens as tensions between the U.S. and China increase, Kinahan said that investors have to continue to "tune out the noise," particularly if they are longtime investors. After all, the presidential tweets come quick, policies change even faster and investors are left reacting to the news of the day only for it to change the next day. As a result, Kinahan has been advocating a bit of burying your head in the sand in the current environment. "It's important to stick with your plan while giving it a look around this time of year to make sure you're still comfortable with your allocations," wrote the strategist. "Reacting to the latest headlines and near-term market gyrations ultimately can cause a lot of stress and possibly disrupt your strategy."

That may be some good advice if investors react to the latest salvo in the trade fight with China. The Wall Street Journal reported earlier Monday that the Treasury Department will announce later this week new limits on Chinese companies that hold a 25% or more stake in a U.S. technology firm. The Chinese companies, under the plan, will be barred from buying the tech company in which they already have a stake.