Should the U.S.-China Trade Truce Affect Your Investing Strategy?

Let’s be clear. Friday’s “deal” between the U.S. and China was really just a cease-fire. Both sides agreed to dial down the rhetoric. And each country made concessions to the other. China agreed to buy more agricultural products, and the United States agreed to suspend the proposed additional tariffs that were scheduled to be enforced on October 15. The more tricky issues regarding intellectual property and the role of the Chinese company Huawei have been tabled for future negotiations.

The markets, of course, were desperate for any deal the two sides could make. To nobody’s surprise, all of the major indexes were up over 1% as a result of the deal. However, after an initial surge, the markets retreated a bit as investors realized that the trade deal was really more of a deal to keep talking.

Analysts are expressing cautious optimism about the truce

As an investor, the trade tension between the United States and China – as well as other countries – has been one of the most significant reasons for the volatility in the market. Analysts are expressing cautious optimism. Bloomberg Economics analysts Tom Orlik and Velena Shulyatyeva wrote in a note regarding the trade truce, “Past experience is that U.S.-China trade agreements aren’t worth the paper they are written on, and this one hasn’t even been written down. For now, though, indications on trade are a little more positive. It that persists, it could help put a floor under sliding global growth.”

The United States was scheduled to increase tariffs on approximately $250 billion of Chinese exports to 30% from 25%. Those tariffs will not move forward. What is less clear is if the additional $180 billion of tariffs scheduled for December 15 will move forward.

The conventional wisdom is that they will not. It was always hard to imagine that the United States would want to impose tariffs that could affect many American companies so close to the holidays. Nevertheless, it’s important to note that no agreement has been made.

How does the trade truce affect investors for the rest of 2019?

In the short term, there are some sectors that will be obvious winners:

1. Agriculture – China has agreed to buy $40-$50 million of U.S agricultural products. That should be good news for stocks such as Archer Daniels Midland NYSE: ADM. ADM is a major exporter of soybeans, ethanol and other agricultural products. The stock is down over 20% in the last 12 months. In its last earnings report, the company reported a 58% year-over-year decline in non-GAAP EPS. This is undoubtedly due to declining exports to China. So, investors looking for a stock that should get a boost should look at ADM.
   
   Another good way to play the agricultural sector is through an agricultural ETF. The Invesco DB Agricultural ETF provides broad exposure to the sector, has a low expense ratio, and provides a small dividend yield.
2. Another way to play the agricultural sector is to buy the companies that are providing heavy equipment to these sectors. Deere & Co. NYSE: DE and Caterpilllar NYSE: CAT are two companies that are expected to benefit from increased spending from agricultural companies.

Steer clear of technology stocks with exposure to China

The trade truce has not completely eliminated the possibility of the December 15 tariffs moving forward. Don Ives of Wedbush Securities says if the tariffs were to be enforced, they would be a “gut punch” to the economy. It may seem contrarian to stay away from tech stocks, particularly when Apple NASDAQ: AAPL stock reached a record high on Friday. However, Apple’s stock is climbing because of strong demand (probably stronger than expected) for its new line of iPhones. Also, many semiconductor stocks are anxiously awaiting a firm resolution to some of the more contentious issues of the trade war. Those issues, particularly those relating to Huawei, are unlikely to be resolved any time soon.

The best advice for investors is not to panic

The deal is not everything investors could have hoped for. But it’s not insignificant. American corporations are already seeing their supply chains impacted due to the tariffs. And since many of these companies do business internationally, this trade dispute has had an impact on the global economy. Anything that would serve to release some of that pressure would be a welcome boost for global equities.

The fact that the two countries are toning down the threats is significant not only to the U.S. market but to global markets. However, as an investor, you have to look at your portfolio and ask yourself if the trade truce should affect your investing strategy.