Do exporters suffer during trade wars?

14 Jun 2018

Dear investors

After a volatile April, markets recovered quite well during the month: The MSCI All Countries, for instance, ended May 3.6% higher. Yet, due to continued polical risk, prices may remain erratic in the months to come: the Iran (and Korean!) nuclear deal, uncertainty about a populist Italian government, and – of course – worries about a global trade war breaking out are making investors rather nervous… This “risk-off” sentiment caused its typical flight to safety last month, which benefited the USD in particular and caused US Markets to end May almost 6% higher.

In this issue of our newsletter we take a closer look at one of the biggest “fear-factors” in the list we mentioned: the potential of an all-out trade-war breaking out between the US and the rest of the world! We take a look at what happened thus far, and investigate how Goldman Sachs’ idea of buying stocks of companies with higher domestic sales exposure has worked in practice since the US announced its tariffs on steel and aluminium on the 1st of March…   



The idea behind the strategy is simple, and Goldman’s chief global equity strategist, Peter Oppenheimer, said it best in a note to GS clients: “below the surface of the market, trade conflict would benefit the performance of the most domestic-facing U.S. stocks, relative to the most foregin-facing firms.” While Goldman make a list of 10 recommended stocks, we thought this sample was a bit small and took about 600 US stocks, split them into 4 quartiles and ranked them on foreign sales divided by total sales. Subsequently, we made a self-financing portfolio that sells US stocks that export a lot and buys companies that mainly sell to the internal US market. The result of this “Long Domestics / Short Exporters" portfolio is plotted by the black line in the graph below. For your convenience we added some colored lines that coincide with  important good or bad news announcements. 

Now, what can we learn from this analysis?

  1. On the whole, heavy export oriented companies did not suffer from the statements going back and forth between the US and China. In the end, their performance was virtually identical to that of companies with a very high domestic sales exposure over the 1/03 to 1/06/2018 period.

  2. Heavy domestic sales exposure stocks do seem to insure against “trade wars fear”: when news freshly hits the market (tariffs go in effect, China takes countermeasures, ban on ZTE, …) exporters clearly suffer compared to more domestic oriented stocks. In fact, in down-market states the L/S portfolio earned about 0.20% alpha per day. Yet, when news hits the markets that is rather positive (negotiations, trade war is put ‘on hold’) this alpha is quickly lost. During up-market states the selffinancing portfolio loses about 0.16% per day.



So, in conclusion, we can say that - so far - the strategy does appear to work. If it really comes to an all-out trade-war this portfolio might offer you some insurance characteristics…  It is of course very possible that this effect is driven by some third variable we did not consider: for instance, it is possible that there are more utility stocks in the domestic portfolio and more cyclical stocks in the export oriented portfolio. While one could correct for this we did not account for these effects in this small analysis, so caveat emptor…

Kind regards,

Werner, Thierry and Nils