Why Techs, Banks May Outperform In a Trade War

By Mark Kolakowski
Published March 14, 2018

In the wake of slapping tariffs on imported steel and aluminum, President Trump reportedly is considering tariffs on about $60 billion of imports from China, including technology, telecom equipment, and apparel, according to Reuters. An escalating trade war could create big winners and losers in the stock market. Credit Suisse Group AG's global equity team says that technology companies, banks, and health care companies are most likely to fare well, per a story in Barron's, while auto, industrial, and retail industries are most likely to be hurt because they are heavily reliant on global supply chains.  

For the year-to-date through the close on March 13, per S&P Dow Jones Indices: the S&P 500 Information Technology Index (S5INFT) is up 10.21%, the S&P 500 Financials Index (SPF) is up 4.50%, and the S&P 500 Health Care Index (S5HLTH) is up 4.19%. By comparison, the entire S&P 500 Index (SPX) has advanced by 3.43%. (For more, see also: 7 Stocks That Will Win in a Global Trade War.)

Technology

Levying tariffs on various tech services and software is difficult, Credit Suisse indicates, per Barron's, while so-called "fabless manufacturing" makes tariffs illogical in their opinion.

Fabless manufacturing essentially is the outsourcing of actual chip production to third parties, usually in Asia, often by U.S.-based semiconductor companies that do their own design and development work. Also, Credit Suisse observes, U.S.-based tech companies have limited domestic alternatives for sourcing their chips and hardware, much of which is produced in Asia.

Possible winners, according to previous Investopedia stories, may include companies such as Microsoft Corp. (MSFT), Adobe Systems Inc. (ADBE), Salesforce.com Inc. (CRM), and Electronic Arts (EA). To be sure, if U.S. tariffs are placed on imports from China, it is entirely possible that U.S. tech companies will find their access to the Chinese market restricted in retaliation. U.S.-based financial services firms already face such barriers. (For more, see also: 5 Tech Stocks' New Growth Engine.)

Banks

A trade war ultimately may push up U.S. interest rates, in Credit Suisse's analysis, which, in turn, would allow banks to increase their profit margins. As summarized by Barron's, this is Credit Suisse's logic: tariffs will weaken productive efficiency in the U.S., weakening the dollar; foreigners hold about 42% of outstanding U.S. Treasury securities, and a falling dollar will reduce their returns when translated into their own currencies; thus, those foreign creditors will demand higher interest payments to compensate for the falling dollar. China may cut back on its purchases of U.S. government bonds, Credit Suisse adds, either as an act of pure retaliation or simply because its trade surplus would have declined as a result of U.S. tariffs.

Winning banks, per prior Investopedia stories, may include the likes of JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Morgan Stanley (MS), and Wells Fargo & Co. (WFC). (For more, see also: 4 Reasons Bank Stocks Will Rise Longterm: Bove.)

Health Care

Health care in the U.S. is almost entirely a domestic industry, and thus largely unaffected by tariffs, Credit Suisse says, per Barron's. Insurers such as UnitedHealth Group Inc. (UNH) and Aetna Inc. (AET) certainly fit this mold, as well as pharmacy chain CVS Health Corp. (CVS). (For more, see also: 12 Beaten Down Health Care Stocks Set to Rebound.)

'Trade War Produces No Winners'

Goldman Sachs Group Inc. also finds that makers of autos and machinery will experience the most significant increases of production costs, as a result of the steel and aluminum tariffs, but that the overall negative impact for U.S. companies will be small. However, Goldman sees a much bigger danger in widespread retaliatory tariffs and trade restrictions that target U.S. exports. (For more, see also: Stock Investors Slash Risky Bets as Bull's 10th Year Begins.)

Michael Binger, senior portfolio manager with Gradient Investments, also sees a big danger in foreign retaliation against U.S. exports. He also wrote, in a commentary for CNBC: "In general, trade tariffs are not positive for economic growth, and a potential ensuing trade war ultimately produces no winners. Tariffs tend to raise prices for consumers, raise costs for businesses using the imported materials in manufacturing and marginally detract from economic growth."