Trade tensions between Washington and Beijing have taken a toll on a variety of U.S. stocks, from industrial companies such as Boeing (ticker: BA) to technology giants such as Qualcomm (QCOM). If the bluster devolves into an actual trade war, investors might want to avoid stocks with a substantial percentage of foreign sales, and not just in China.
One such “trade-war proxy” basket of 24 stocks, compiled by the Leuthold Group, fared well in the first two months of the year, beating the Standard & Poor’s 500 index (on an equal-weighted basis) by about four percentage points. But it has underperformed the market by about four percentage points since March 1, when President Trump announced plans for tariffs on steel and aluminum, triggering trade tensions and spooking the broader market.
The companies in Leuthold’s basket all share two features: Each generates a high percentage of sales abroad, most of them well above 50%. And the stocks all underperformed the S&P 500 during the trade-war sell-off that knocked the market down by 2.5% in March. Leuthold also screened for stocks with volatility similar to that of the S&P 500, aiming to avoid stocks that, by their nature, would fall more than the market in a broad sell-off.
So who’s in the trade-war cross-hairs? Boeing (BA) and Expeditors International of Washington (EXPD) look vulnerable, according to Leuthold. Chemical manufacturers such as Albemarle (ALB), DowDuPont (DWDP) and Mosaic (MOS) could also get hit.
Perhaps most vulnerable, though, are large technology companies. Tech firms account for 11 of the basket’s 24 stocks, including semiconductor makers, hardware firms and components suppliers. Apple (AAPL), HP (HPQ), Skyworks Solutions (SWKS), Texas Instruments (TXN) and Qualcomm (QCOM) are all in Leuthold’s basket. Each of these firms generates well over half of their sales abroad, led by Skyworks and Qualcomm at about 98% each, according to Leuthold.
Other tech stocks with heavy foreign sales exposure include Advanced Micro Devices (AMD), Amphenol (APH), IPG Photonics (IPGP), TE Connectivity (TEL) and Qorvo (QRVO)—all with more than 65% of their sales abroad.
One of the more surprising names on Leuthold’s list is International Flavors and Fragrances (IFF). The firm makes perfumes, food flavoring and fragrances for goods such as laundry detergent. That’s hardly the stuff of heated trade rhetoric (so far). Yet IFF, generating 75% of its sales abroad, has been a laggard, falling 2.6% over the past month, underperforming the average specialty chemical stock by 1.8 percentage points. For the year, IFF is down about 10%, trailing its industry group by 5.2 percentage points.
Of course, trade rhetoric isn’t the only factor impacting these stocks. But it isn’t helping their cause. And investors should consider the potential for trade tensions to escalate beyond China, says Chun Wang, a senior analyst and portfolio manager with Leuthold. “We think a trade war will be more global in scope,” he says.
Many companies in Leuthold’s trade-war basket also have lots of exposure to Europe and especially to Germany, Wang adds. Germany racked up a large trade deficit with the U.S. last year, amounting to $64 billion. And it is running a deficit of $5.3 billion a month in 2018. “The focus is on China now,” says Wang. “But you never know. Next month, Trump might turn the screws on Germany.”
