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Goldman Sachs Has A Strategy To Play The Trade War & It Might Surprise You

Goldman Sachs Has A Strategy To Play The Trade War & It Might Surprise You

If the trade war has you spooked, 9 stocks identified in Goldman’s latest note look to be safe bets now.

Markets have been reeling this week under the threat of a full-blown trade war with China.

Last Sunday, President Trump tweeted that increased tariffs on Chinese goods would go into effect this week, and so they did late Thursday night.

Immediately after the midnight deadline for the tariff hike, China’s Commerce Ministry said that it would take countermeasures against the move by the U.S. The Ministry didn’t announce what its retaliation would entail, but said that it “deeply regrets” this turn of events.

While it had been hoped that a resolution would be reached between the U.S. and China prior to the increased tariffs going into effect, no such deal materialized. However, Vice Premier Liu He is in Washington and negotiations between the two countries is scheduled to resume on Friday.

“This evening, (United States Trade Representative Robert Lighthizer) and (Treasury Secretary Steve Mnuchin) met with President Trump to discuss the ongoing trade negotiations with China. The Ambassador and Secretary then had a working dinner with Vice Premier Liu He, and agreed to continue discussions tomorrow morning at USTR,” said Judd Deere, White House Deputy Press Secretary, in a statement Thursday evening.

Despite these ongoing trade talks, the Trump administration hiked tariffs on Chinese products to 25%, up from 10%. 

The action risks worsening the trade war that has spooked investors for much of the last year. But Goldman Sachs (NYSE: GS) has told its clients that there will be one distinct group of winners—and a group of losers—in the stock market as the trade drama unfolds.

According to a note from the investment firm, service-providing companies like Amazon (NASDAQ: AMZN) will fare far better than goods-producing companies like Apple (NASDAQ: AAPL) in a trade war with China. 

“Services firms are less exposed to trade policy and have better corporate fundamentals than goods companies and should outperform even if the trade tensions are ultimately resolved, as our economists expect,” wrote Goldman’s chief U.S. equity strategist, David Kostin.

Goldman says services stocks like Amazon, Google (NASDAQ: GOOGL, GOOG), and Microsoft (NASDAQ: MSFT) have less input costs that are subject to tariffs and should therefore outperform.

“The trading pattern during the past year of tariff announcements and delays suggests services-providing stocks will outperform goods-producing stocks as long as the trade dispute continues,” the analysts wrote in the note.

The analysts also pointed out that these companies have more stable gross margins and stronger balance sheets, which could lead to outperformance regardless of what happens with the trade war.

Other companies in the services basket include names like Facebook (NASDAQ: FB), AT&T (NYSE: T), and McDonald’s (NYSE: MCD), which the Goldman analysts said are expected to grow 2019 sales by 9% and earnings by 7%. The firm also said services stocks Netflix (NASDAQ: NFLX), Comcast (NASDAQ: CMCSA), and Wells Fargo (NYSE: WFC) should outperform.

Goldman said that of the 260 companies in the services basket, 175 of them also fall into the firm’s domestic sector basket, and thus are less exposed to China. Meanwhile, the goods-producing basket is overwhelmingly international, with 193 companies falling into Goldman’s global sector basket.

The companies in the goods-producing basket—with stocks like Apple, Johnson & Johnson (NYSE: JNJ), and Exxon Mobil (NYSE: XOM)—are more exposed to retaliation by China.

Other names in the goods basket include Procter & Gamble (NYSE: PG), Intel (NASDAQ: INTC), Chevron (NYSE: CVX), Coca-Cola (NYSE: KO), and Boeing (NYSE: BA), all of which are projected to have negative earnings growth of 2% and no sales growth this year, Goldman said.

“The faster growth rate supports the valuation premium of services, which trades at a 17.5x forward P/E multiple vs. 16.8x for goods,” Kostin wrote in the note.

Goldman said that other goods-producers PepsiCo (NASDAQ: PEP), Broadcom (NASDAQ: AVGO), Honeywell (NYSE: HON), and Nvidia (NASDAQ: NVDA) should also be avoided.

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