Don’t let the rise on our market this morning fool you. This could be the calm before the storm with most investors sitting on the sidelines at the moment as they watch the escalating risk of a global trade war.
The S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is up 0.3% on light volume and I suspect the market will be range bound at a decade and a half high as investors await US President Donald Trump’s next move after China retaliated against his US$34 billion trade sanctions with its own tariffs on US imports.
Trump is reportedly mulling expanding tariffs on a much wider range of Chinese imports and that move will likely trigger a sell-off on global markets, including our own given our dependency on the Chinese economy.
Let’s be clear. There is probably no place on the ASX to hide if a global trade war breaks out but there are areas of the market that will potentially fare much better than the broader market.
We can thank the US dollar for providing a relatively calmer harbour for investors to drop anchor. Experts agree that a global trade tiff will drive capital into US Treasuries (government bonds) and that means further gains for the almighty greenback.
Local investors who prefer to stick to domestic assets could try to ride this trend by focusing on ASX stocks with material exposure to the US currency while having a business that won’t be directly targeted by trade tariffs.
One stock that fits this bill is BlueScope Steel Limited (ASX: BSL). While Trump has slapped a 25% tariff on imported steel, this won’t be applied to Australia. At the same time, the tariff has driven up the price of US steel which will benefit BlueScope’s joint venture in the US.
On top of that, BlueScope also benefits from the cut in the US corporate tax rate. The ASX-listed steelmaker is well positioned to benefit from the global trade spat in ways that most other US dollar-earners are not.
Another stock that I think is worth buying is packaging group Amcor Limited (ASX: AMC). It too has a large US-dollar exposure and most of the industries it services are in the food and beverage and healthcare spaces – areas of the economy that are more stable and less cyclical.
The stock also looks like good value as it trades on a FY19 consensus price-earnings (P/E) multiple of around 21 times. That is at the low end of its historical P/E range with the stock falling 11% over the past year when the top 200 stock index has rallied 10%.
Finally, I think building materials group Boral Limited (ASX: BLD) could provide some shelter from a trade war. It too has a large US exposure and it will additionally benefit from the infrastructure spending boom in both the US and Australia.
Regardless of trade tensions, Trump is promising to spend big on infrastructure and he is likely to keep his word on this – particularly if the US economy slows due to the trade dispute as he will need to offset that blow with some form of additional stimulus.
Again, I am not saying these stocks won’t be swept up in any market meltdown, but at least they have the fundamentals to hold their ground compared to most other stocks on our market.
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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited and Boral Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.