Markets

Investors can hide out in domestic stocks from the China trade war

Key Points
  • Goldman created a domestic sales basket for its clients, consisting of 50 S&P 500 stocks with the highest domestic revenue exposure.
  • It is based on the geographical breakdown of sales reported by firms in their 2018 10-K filings.
  • Insurers Allstate and Anthem have shown resilience amid the intensified trade tensions, both gaining about 10% in the past three months.
  • Discount retailer Dollar General and self-storage company Public Storage also held up very well amid the escalated trade war.
Traders work on the floor at the New York Stock Exchange, August 5, 2019.
Brendan McDermid | Reuters

A consensus is forming on Wall Street the U.S.-China trade war will drag on till at least 2020 presidential election, so where could stock investors go amid the prolonged uncertainty?

Goldman Sachs' answer is companies with big domestic sales, or those with little to none exposure to China tariffs.

"What we are focusing on with our clients now... are companies that are more domestically facing in terms of the source of their revenue," Goldman Sachs chief U.S. equity strategist David Kostin said on CNBC's Squawk on the Street on Tuesday.

Goldman created a domestic sales basket for its clients, consisting of 50 S&P 500 stocks with the highest domestic revenue exposure. It is based on the geographical breakdown of sales reported by firms in their 2018 10-K filings. The median stock in the basket derives 100% of its revenues domestically compared with 71% for the median S&P 500 company. The chart above highlights a select few names from the basket.

The basket spans across sectors, including financials, health care companies, utilities and industrials. These companies derive all their revenue domestically.

Insurance giant Allstate has shown resilience amid the intensified trade tensions, gaining nearly 9% in the past three months. Health insurer Anthem also climbed almost 10% over the last three months, compared to the flat performance in the S&P 500.

Discount retailer Dollar General held up very well as most of the retail sector took a hit from the China tariffs, rising 10% in the past three months. Self-storage company Public Storage also dodged the trade war, popping 3% this month as the S&P 500 plunged more than 3%. 

No deal until 2020

The U.S.-China trade war escalated recently after President Donald Trump surprisingly slapped additional tariffs on Chinese goods. China retaliated by halting its purchase of U.S. agricultural products, while allowing its yuan to breach a key level — 7 against the dollar. China on Tuesday stabilized the currency, sparking a rebound in stocks.

In light of recent developments, Goldman and many others on Wall Street are no longer expecting a trade deal before 2020 election.

"While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects, we are now less confident that this is his view," analysts at Goldman Sachs said in a note Tuesday.

The tit-for-tat actions are taking a toll on many companies with big footprint in China, especially chipmakers, retailers as well as tech giant Apple.

American chip stocks have been under pressure after the U.S. put Chinese telecom giant Huawei on a blacklist, forcing U.S. chipmakers to cut ties with it. Apple also took a big hit as it relies on a large portion of sales from China.

Retailers and department stores including Kohl's, Macy's and Nordstorm also suffered as the new round of China tariffs cover items such as clothing and TVs.

"Growing protectionism is not conducive to better earnings," Tobias Levkovich, Citi's chief U.S. equity strategist, in a note late Monday. "The overhang of a sluggish economy, trade war threats and potential currency devaluation is likely to take a toll on 2H19 profits."