Investor uncertainty about whether the U.S.-China trade war will escalate has caused major market upheaval in recent days as both nations prepare for a new round of talks. Investor hopes for a temporary truce between the world's top two economies boosted global markets last week, benefiting industrial stocks that have been hard hit by trade war volatility. Now, some market watchers see even a partial thaw in hostilities as positioning shares of companies with significant China sales exposure for a comeback. Industrial stocks such as Stanley Black & Decker Inc. (SWK), Caterpillar Inc. (CAT), Emerson Electric Co. (EMR), Deere & Co. (DE), AGCO Corp. (AGCO) and 3M Co. (MMM) are seen as possible winners, as outlined by Barron’s.
6 Stocks With Big China Exposure
|Company||Description||YTD Stock Performance|
|Stanley Black & Decker||Industrial tools and household hardware manufacturer||-25.5%|
|Caterpillar||Construction machinery and equipment company||-17.9%|
|Emerson Electric||Manufacturing and engineering company||-5.8%|
|Deere||Equipment, tools, technology and services provider||-3.1%|
|AGCO||Agricultural equipment manufacturer||-17%|
|3M||Industry, health care and consumer goods conglomerate||-14.1%|
At the G-20 summit in Buenos Aires last week, the two economic powerhouses agreed to pause any escalations in the trade war. For a period of 90 days, the U.S. will hold off on upping its 10% tariff on $200 billion worth of Chinese goods to a 25% rate. President Donald Trump and President Xi Jinping's meeting spurred new optimism about prospects for beaten down industrial players, particularly for those that have both heavy Chinese exposure and are in the red this year.
Stanley Black & Decker Looks Cheap
Barclays analyst Julian Mitchell was out with an upbeat note on shares of Stanley Black & Decker, noting that investors are already dialing in “large 2019 headwinds from tariffs.”
In Q3, Stanley management estimated the loss from the latest proposed tariffs at $250 million, or roughly 13% of the consensus estimate for 2018 operating income at $1.9 billion.
The company's stock has sharply underperformed the broader market this year, down 25.5% year-to-date (YTD) versus the S&P 500’s modest 1% return and the Industrial Select SPDR ETF’s (XLI) 6.5% loss.
Despite risks, notably Stanley’s exposure to Chinese sales, the stock has seen its valuation plunge from 20 times estimated earnings to 15 times earnings this year, noted Mitchell. Meanwhile, the Street is forecasting 2019 earnings growth at 8%, while a majority of revenues are still generated in the U.S. The Barclays analyst views investor sentiment as overly pessimistic, presenting an opportunity for bargain hunters to buy Stanley shares at a discount.
Agricultural Companies to Benefit
Mitchell highlighted a few other of his top picks with significant China sales exposure, such as agricultural companies Deere and AGCO. The Street cheered an announcement from the White House indicating that China will “immediately” begin to purchase a “very substantial” amount of agricultural products from the U.S.
Baird’s Mig Dobre echoed the bullish outlook for Deere, naming it a “fresh pick” on Monday.
“China trade war detente should boost sentiment and multiple near term,” wrote the analyst. He also placed outperform-rated Caterpillar in the same fresh pick category, citing the same positive headwinds.
What’s Next for Investors
Not all are so bullish on improving trade conditions. Market volatility resumed this week on concerns that Washington’s truce with China was already floundering. On Tuesday, stocks took a tumble on Mr. Trump’s tweet declaring himself a “Tariff Man.”
Stephen Nagy, senior associate professor at the International Christian University in Tokyo, is among the skeptics.
“After the 90-day truce, trade tensions will continue and likely even deepen,” he stated, as cited by CNBC.
Others, including Adam Triggs, director of research for the Asian Bureau of Economic Research at Australian National University, have went as far as to call the bilateral truce deal a “mistake” that “undermines the global trading system, will divert trade from other countries and will not reduce the U.S. trade deficit anyway.”
Market volatility will likely continue as fears rise regarding the U.S. and China’s inability to find common ground within the brief truce period, as more tariffs threaten to weigh on global economic growth. That being said, the G-20 news could be enough to carry industrial stocks higher through the remainder of 2018.
The XLI ETF is down 3.8% on Wednesday afternoon, while the broader S&P 500 has fallen 3.2%.