5 asset classes that remain resilient to the trade war—5 that don’t

The escalating U.S.-China trade war has rattled financial markets lately, as four of the 10 most volatile trading days of 2019 to date occurred last month alone.¹

5 asset classes that remain resilient to the trade war

Keeping up with August’s quickly changing scorecard has been challenging. China announced it will raise retaliatory tariffs on U.S. cars, auto parts, soybeans, and other goods totaling $75 billion, prompting the U.S. administration to respond with its own tariff increases on over $300 billion of Chinese-made consumer products.² These trans-Pacific proclamations represent only some of the recent, rapid rhetorical jousting, leaving investors confused and unsure of what’s next. Rather than reacting and getting whipsawed by the sudden shifts in sentiment, we believe that investors can create diversified portfolios that seek to minimize downside risks from the trade war, however long it may last.

Is a trade war market regime really developing?

Until recently, most of the world’s major economies had been moving along a trajectory toward greater globalization, and we hadn’t seen material tariff increases in the United States since the 1930s.³ However, we now have nearly two years of cross-asset market data available since the U.S. administration announced its initial tariffs—on imported washing machines and solar panels—on January 22, 2018. Although the brief horizon from then until now represents a relatively small sample size, we’ve witnessed commonalities among those financial asset characteristics that have done well, just as we’ve seen certain features linking those that haven’t done well. With the help of Morningstar Direct, we identified the 20 best- and worst-performing asset classes of this trade war to date.

Top 5 asset classes among the leaders

Asset class leaders since the trade war began have included defensive equites, long-duration U.S. Treasury bonds, quality growth equities, and certain other U.S. dollar-denominated assets.

Asset class Annualized total return 1/22/18 to 8/31/19
U.S. equity—utilities sector 18.8%
U.S. equity—real estate sector 17.4%
Long-duration U.S. Treasury bonds 14.5%
U.S. equity—information technology sector 12.5%
U.S. equity—low volatility 11.5%
 

Bottom 5 asset classes among the laggards

The laggards have included cyclical and industrial equities, commodities, and a broad range of non-U.S. equity segments across capitalizations, styles, and developed and emerging markets.

Asset class Annualized total return 1/22/18 to 8/31/19
Emerging-market equity—large growth -10.8%
International equity—large value -11.3%
Chinese equity -13.1%
Copper -13.3%
U.S. equity—energy sector -13.6%
 

Participate and protect—a unifying theme behind 3 portfolio ideas

What to do now? Risk management is crucial in a late-cycle environment marked by escalating global trade tensions. We’re urging clients to strike a balance: a mix of offensive and defensive exposures to participate in the market’s upside potential while maintaining a healthy measure of protection against the next downturn. We currently favor three market segments in particular:

  1. U.S. quality equities: As a group, U.S. equities continue to post better earnings than their non-U.S. counterparts, and the quality factor has historically been among the top drivers of returns in late-cycle market environments. Quality—as represented by companies posting relatively high returns on equity, strong margins, consistent earnings growth, and low debt ratios—offers investors the opportunity to participate and protect.
  2. Global infrastructure and utilities: Global growth continues to slow, as evidenced by weakening purchasing managers’ indexes across Asia and Europe, and most companies are sensitive to changes in the economic cycle. However, since people around the world rely on them for life’s nondiscretionary necessities, global utilities and infrastructure companies often benefit from long-term contracts, inflation-adjusted returns on investment, and steady demand in both good times and bad. Moreover, many offer an attractive combination of dividend yield and solid growth potential at a moment when both remain scarce.
  3. U.S. investment-grade corporate bonds: In a world marked by negative interest rates in certain regions, high-quality corporate debt issues offer appealing current yields and low correlations with equity markets. Fundamentals remain strong and default risks remain muted across the investment-grade spectrum. Additionally, the embedded duration serves as a tailwind in environments of falling interest rates.

Finally, remember that, especially in times like these, financial advisors can be great resources for developing comprehensive strategies that align with investors’ most important long-term goals.

Register now to see the entire list

To see our full list of the 20 best and 20 worst performing asset classes of the trade war to date, register at jhinvestments.com today.