Here’s how UBS analysts expect different sectors to respond in an environment of rising trade tensions, and their views on which stocks would be more or less affected by adverse trade actions. The stock market has not priced in an escalation of trade tensions, which would slam some companies more than others, bite into earnings growth and force companies to raise prices and cut spending, according to UBS.
Keith Parker, head of U.S. equities strategy at UBS, said if the next round of U.S. tariffs on $200 billion of Chinese goods is put in place, earnings could take a hit of about 5 percent and the stock market could see a mid-single-digit decline.
If trade frictions with Europe resume and global auto tariffs are put in place, stock prices could see an 11 percent decline. But in a full-blown global trade war, where the U.S. and China are retaliating with higher and higher tariffs and other actions, the stock market could lose more than 20 percent, commodities prices could collapse and growth would slow in both countries, he said.
Parker and other UBS analysts issued a comprehensive note this week on the effect of different trade scenarios on a wide range of companies and sectors.
Companies most directly affected by trade issues could have a hit to earnings that is 10 percent to 40 percent greater than the hit to S&P 500 profits, they said. In a full-scale trade war, where the rift intensifies and tariffs are put on nearly all goods, S&P earnings could take a 14.6 percent hit.
- An escalation of trade wars is not priced in to the stock market and it could cut into earnings and stock prices, the extent to which would depend on how tense the situation becomes.
- UBS equities analysts said companies at most risk in a trade war are already underperforming, and in a worst-case scenario of a global trade war, the stock market could lose 20 percent.
- But UBS chief U.S. equities strategist Keith Parker said while the trade situation is unclear, for now, the next round of proposed U.S. tariffs of about 10 percent on $200 billion in Chinese goods could dent stock prices by a few percent, in the mid-single digits.
UBS analysts said the stocks in their coverage universe most impacted by trade tensions have underperformed the S&P 500 by about 4.5 percent since trade frictions began to intensify in mid-March.
They identified 34 companies from diverse sectors, including machinery, retail, semiconductors, energy and autos. Companies and industries in sectors affected could see an earnings per share hit more than double the impact on the overall S&P 500 if trade tensions worsen. The full brunt of trade escalation is not priced in, they said in a note released earlier this week.
The analysts said the hardest-hit semiconductor companies would include Qualcomm and Micron, because they have the most direct revenue exposure to China. About 65 percent of Qualcomm’s revenue is from China and Micron’s is just over 50 percent.
In retail, companies that import higher amounts of goods from China would be more adversely affected. For instance home furnishings sellers import anywhere from 30 percent to 70 percent of their products from China, so Pier 1 is on the list. Consumer electronics retailers source an estimated 50 percent to 60 percent of their merchandise from China, and that affects Best Buy.
Companies affected by tariffs on agriculture also made the list and that includes Deere.
Electrical equipment and multi-industry — The least affected would be those with a higher domestic exposure, lower debt and the ability to raise prices. Within the sector, there’s higher risk for exposure to autos. Less impacted: Danaher and 3M. More impacted: ITT, Rockwell Automation and SPX Flow.
Machinery — Higher steel prices from tariffs have already hit this sector, and some hits to earnings are priced in. UBS recommended favoring domestically oriented companies in machinery, and to avoid stocks exposed to falling agricultural commodity prices. Less impacted: United Rentals. More impacted: Deere, ITW.
Autos — Stocks with U.S. production and cost advantages should do better than companies that rely on significant Chinese imports. Less impacted: Ford. More impacted: Aptiv or Visteon.
Freight transport — Companies with limited revenue exposure outside the U.S. should do better. There is not much expectation of a trade war priced in, but companies would likely pare capital spending and trim work forces in the event of one. Less impacted: Echo Global Logistics, Heartland Express and Werner Enterprises. More impacted: Canadian Pacific, Canadian National Railway and Expeditors International.
Semiconductors — Companies that have no non-U.S. alternatives and have performance-driven products should do better than those with significant Chinese revenue exposure. Less impacted: Nvidiaand Intel. More impacted: Qualcomm, Micron and AMD.
Retailers, food chains — UBS does not see much evidence that a larger trade war is priced into this sector. Chains with pricing power should do better than those with significant imports from China. Home furnishings firms source most products from China, from 30 percent to 70 percent, but auto parts are 30 percent to 40 percent. Less impacted: Advance Auto Parts, O’Reilly Automotive and Tempur Sealy. More impacted: Bed Bath and Beyond, Best Buy and Pier 1 Imports.
Chemicals — Companies with less cyclical businesses, that are consumer focused and have less Chinese exposure should do better than companies more exposed to slowing global growth and pricing tied to crude oil. Less impacted: International Flavors and Fragrances, Ecolab and Mosaic. More impacted: Olin, LyondellBasell, and Methanex.
Metals and Mining — Companies with gold exposure as a hedge and high-grade steel makers that would benefit from reductions in Chinese steel capacity should do better than companies with exposure to copper, the U.S. auto sector and a slowdown in Chinese growth. Less impacted: Barrick, Vale. More impacted: AK Steel, Gerdau.
Oil and gas — Large-cap companies that are diversified and buyers of their stock should do better than the smaller-cap stocks that are highly levered to oil. Less impacted: Occidental, ConocoPhillips. More impacted: Denbury Resources, MEG Energy.