Goldman Sachs has a new battle plan for the trade war: Buy service-providing stocks and avoid goods-producing companies.
“Services stocks have less exposure to trade conflict given they have lower foreign input costs that might be subject to tariffs and lower non-US sales than Goods firms,” Goldman Sachs chief U.S. equity strategist David Kostin said in a note to clients.
The trade war between the U.S. and China escalated in recent weeks after President Donald Trump’s surprise announcement of 10% tariffs on the remaining $300 billion in Chinese imports that had eluded duties. Markets had their worst day of the year on Aug. 5, after China let its currency weaken, crossing the 7 yuan-per-dollar threshold, and said it would halt imports of agricultural goods from the U.S.
Kostin said services stocks including Facebook and Verizon have faster sales and earnings growth as well as more stable margins than goods firms. Services stocks have outperformed goods-providers by 530 basis points in 2019 and by 150 basis points in the third quarter, Kostin said in his note Friday.
“Stronger services inflation should also benefit those firms relative to Goods firms. However, the relative valuation of Services vs. Goods is slightly elevated vs. history,” he added.
Favoring services companies is the latest strategy Goldman has given clients to combat the trade war. Last week, Kostin told CNBC that Goldman is focusing on domestically facing companies with its clients. Goldman created a domestic sales basket consisting of 50 S&P 500 stocks with the highest domestic revenue exposure.
Goldman Sachs also lowered its fourth-quarter growth forecast on Sunday by 20 basis points to 1.8%, citing a larger than-expected impact of recent trade war events.
The firm does not expect a trade deal before the 2020 election.