Monday, May 6th 2019

Stocks Fall as U.S.-China Trade War Escalates

Commentary

U.S.-China trade war tensions had been quiet since December, but erupted again this weekend. We still believe Titan co's are mostly resilient.

Stocks Down on U.S.-China Trade Tensions##

Global stock markets fell on Monday on U.S.-China trade tensions. Both countries had been pretty quiet since December, but tensions erupted again this weekend.

President Trump announced two fresh trade war attacks:

  • Increasing the tax we impose on $200B worth of annual imports from China, from 10% to 25% this Friday
  • Adding $325B of additional "Made in China" goods to the list of imports taxed at 25%

Who is Impacted?##

Tariffs hurt importers, exporters, and most consumers:

  • Corporate winners: "Made in USA" companies stand to benefit. Chinese rivals become more expensive relative to domestic-made goods (e.g. Harley-Davidson motorcycles, John Deere tractors).

  • Corporate losers: American exporters (e.g. Caterpillar) suffer from China's retaliatory tariffs. They either need to raise prices for consumers abroad, or eat the tariffs themselves.

  • Consumers: We effectively "pay" for tariffs via higher prices on what we import from China

What It Means for Titan##

We believe two stocks in the Titan composite could be fundamentally impacted by tariffs (both import some raw materials from China):

- Apple - Broadcom (chip supplier to Apple)

Most Apple products are assembled in China, but fall into the "not tariffed yet" category. Trump is threatening to include the whole suite of Apple products, which would hurt AAPL's profits, though we believe it has lower likelihood given the importance of AAPL to the overall U.S. economy's bottom line.

Overall, we think the Titan composite has minimal exposure to Chinese tariffs. The predominantly asset-light, services-heavy portfolio stocks are positioned to do quite well in most environments, in our view.

Like we mentioned in late 2018 in our State of the Markets, we believe the sharp decline in stocks today could be an opportunity for long-term investors willing to look beyond the tit-for-tat dynamics you hear in the media.

Bottom line: emotions often drive markets in the short term, but in the long run, we think the Titan composite's earnings are relatively immune from the threatened tariffs.

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