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China Slaps Fresh Tariffs on U.S. Goods: 6 Defensive Picks

Swarup Gupta
Defensive sectors, such as real-estate, consumer staples and utilities are likely to gain popularity in the current scenario.

On Aug 8, China declared that it would retaliate against fresh tariffs imposed by the United States on Chinese imports. The country’s ministry of commerce announced that China has decided to impose a 25% tariff on U.S. goods worth $16 billion.

This follows the U.S. Trade Representative’s move to impose tariffs on Chinese goods worth the same amount. The latest exchange in a simmering trade conflict was one of the reasons for stocks closing largely in the red on Wednesday.

With bitterness increasing between the United States and its trading partners, defensive stocks have grabbed investors’ attention. These stocks offer slower but stable growth during periods of uncertainty. Since they also hold out the promise of higher-than-average yields, investing in defensive stocks looks like a prudent option at this point.   

China Retaliates With Fresh Tariffs

On Wednesday, China said that it is imposing a 25% tariff on U.S. goods worth $16 billion. China’s ministry of commerce has characterized the Trump administration’s decision to levy a 25% tariff on U.S. goods of an identical value as “very unreasonable.” This is why it feels that China should retaliate to protect its legitimate interests.

These tariffs will come into effect from Aug 23 and are targeted at 333 goods. This list of U.S. goods includes large passenger cars and motorcycles. A wide variety of fuels and fiber optic cables also feature on the list. China is also targeting asphalt, Vaseline, coal, grease, plastic products and recyclables.    

Trade Tensions to Continue

With the United States and China imposing tit-for-tat tariffs, there seems to be no end to the trade war in sight. Fresh U.S. measures mean that $50 billion worth of U.S. goods now face a 25% tariff. Meanwhile, the Trump administration is thinking about imposing a 10% duty on an additional $200 billion worth of Chinese goods.

This rate could even be raised to 25% after a comment period ends on Sep 6. In such an event, China would likely impose tariffs on a further $60 billion of U.S. goods. Analysts feel that the point of no return hasn’t been reached but it is getting closer. In fact, Trump has indicated that he could impose duties on all Chinese imports, which exceeded $500 billion in 2017.

Defensive Picks in the Limelight

Given this backdrop, defensive sectors, such as real-estate, consumer staples and utilities will likely gain popularity among investors. These stocks grow at a slower pace than the rest of the economy. However, they are more stable in nature and safer during periods of economic uncertainty.

These also offer dividend yields that are higher than the overall market. Such a characteristic had actually decreased their attractiveness during a year when treasury yields have peaked. But with trade tensions cropping up, they may prove to be popular, especially among risk-averse investors.

Our Choices

China’s decision to impose retaliatory tariffs indicates that trade tensions with the United States are likely to continue. Several more rounds could be played out before the countries reach a point of no return. However, that point is inching ever closer with Trump determined to expand the scope of his protectionist measures.

Investing in defensive stocks, which offer a safe and stable choice during periods of uncertainty looks like a good option at this point. Further, they carry the promise of above-average dividend yields. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

NRG Yield, Inc. NYLD, along with its subsidiaries, owns and operates a diversified portfolio of contracted renewable and conventional generation, and thermal infrastructure assets in the United States.

NRG Yield has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 38.9% for the current year. The Zacks Consensus Estimate for the current year has improved 16.8% over the last 30 days. The stock has a dividend yield of 6.7%.

Archer Daniels Midland Company ADM is one of the leading food processing companies in the world.

Archer Daniels Midland has expected earnings growth of 35.1% for the current year. The Zacks Consensus Estimate for the current year has improved 6.2% over the last 30 days. The stock has a dividend yield of 2.7%. It has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sutherland Asset Management Corporation SLD is a commercial mortgage real estate investment trust (REIT).

Sutherland Asset Management has a Zacks Rank #2 (Buy). The company has expected earnings growth of 16.6% for the current year. The Zacks Consensus Estimate for the current year has improved 2.2% over the last 30 days. The stock has a dividend yield of 9.8%.

DTE Energy Company DTE is a holding company with subsidiaries engaged in regulated and unregulated energy businesses.

DTE Energy has a Zacks Rank #2. The company has expected earnings growth of 10.1% for the current year. The Zacks Consensus Estimate for the current year has improved 6.7% over the last 30 days. The stock has a dividend yield of 3.2%.

City Office REIT, Inc. CIO focuses on acquiring, owning and operating office properties in the United States.

City Office REIT has a Zacks Rank #2. The company’s expected earnings growth for the current year is 17%.The Zacks Consensus Estimate for the current year has improved 0.9% over the last 30 days. The stock has a dividend yield of 7.4%.

Matthews International Corporation MATW is a designer, manufacturer and marketer principally of memorialization products & brand solutions.

Matthews International has a Zacks Rank #2. The company has expected earnings growth of 8.3% for the current year. The Zacks Consensus Estimate for the current year has improved 0.3% over the last 30 days. The stock has a dividend yield of 1.5%.

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