Market Monitor: Andy Kapyrin Picks

Trade War:

The White House is willing to endure crises that have a measured negative impact on economic growth.

Government shutdown: 34 days, Kevin Hassett, the chairman of the Council of Economic Advisers, estimated that the shutdown would reduce quarterly economic growth by 0.13 percentage points for every week that it lasts = 0.63% for 4+ weeks.

The trade war could take some time to resolve.  Based on what we’ve seen with NAFTA/USMCA, it took nearly 2 years to reach an agreement, and we’re still working to get the deal approved by Congress.  We just recently reached an agreement to lift steel and aluminum tariffs on Mexico and Canada to help get the agreement ratified.  For China, step 1 will be coming to an agreement.  Step 2 will be addressing the tariffs that are already in place, which could drag out the timeframe. 

Stock market movements:

Market is content to receive good news and we have a solid floor of economic growth (3.2% Q1 2019) to absorb temporary setbacks.

Global diversification is more important than ever – no one wins a trade war, but there are one-off winners and losers as supply chains are adapted to help manage cost.  For example, soybean tariffs hurt US farmers but helped Brazilian farmers. 

Difficult to hedge or time policy risk – 2020 elections will create pressure to improve domestic sentiment quickly. 

Interest rates:

Global flight to safety is keeping a lid on rates.  Reflection of sentiment and expectations for slower global growth going forward.

In fixed income, avoid locking in rates for too long.  Stay at the short to intermediate end of the curve for bond allocations, high quality.

3 stock that should be durable in an escalating trade war:

Anthem – Health insurers like Anthem stick to their home market, in this case America, and provide an essential service.  Anthem has been following in the footsteps of competitors like United Healthcare to improve its profitability and growth.  Some of their strategies in the near term that may pay off – Anthem is working on building out its own Pharmacy Benefit Manager, similar to UNH, which may help to contain cost growth.  At the same time, they’ve made meaningful inroads into Medicare Advantage plans and into the market for commercial plans.  They’re on track to meaningfully improve revenue growth in 2019.

Royal Dutch Shell – Supermajor oil producers are a good way to avoid trade tensions because their products are essential to economies – few can afford to block their import.  Shell is one of my favored oil supermajors.  Supermajors take some of the x-factor out of investing in oil companies.  They tend to diversify beyond just oil production, into natural gas and oil refining.  They also tend to own assets in the cheapest areas for production.  That gives them a lot of cushion against oil price volatility, of which we’ve seen plenty since 2015.

Alphabet – Google’s parent company doesn’t have much to lose from tension between the US and China because it doesn’t really have much presence in the PRC – it’s the search engine used for just 3% of searches in that country primarily from Hong Kong because it is blocked in the mainland.  I find myself in a bind recommending Google’s parent Alphabet.  That’s because I’m a value investors, so FANGs don’t generally make my buylist.  But Alphabet makes sense for today’s value investor.  It is a company that trades at a modest premium to the market overall, but for a much higher quality company.  It earns a substantially higher profit margin than its peers and has matured as a corporation overall.



This entry was posted in Market Monitor. Bookmark the permalink.

Leave a Reply