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US, China May Resume Trade Talks: 4 Manufacturing Picks

Swarup Gupta

On Sep 12, Larry Kudlow, President Trump’s chief economic advisor confirmed that Treasury Secretary Steven Mnuchin has sought fresh trade talks with China. This development comes at a time when Republicans are putting up a tough fight for the upcoming mid-term polls.

The fallout of tariffs is likely to be a major issue during these elections. On the Chinese front, the country’s economy and markets are feeling the heat from the trade war. This is why they may still wish to pursue tough negotiations.

Though unlikely at first glance, an agreement between the United States and China, even in the short term, may actually come about. This is why it makes sense to invest in manufacturing stocks that have come under a cloud after the trade war began in earnest.

Kudlow Confirms Reports of Talks

Early on Sep 12, The Wall Street Journal reported that the Trump administration had sought fresh trade talks with China. Following the report, U.S. stocks closed in the black after enduring a muter trading session. At the time, the rationale attributed to such an overture was that Washington was willing to give Beijing a chance to resolve outstanding issues ahead of the imposition of fresh tariffs.

Later in the day, head of the White House National Economic Council Larry Kudlow confirmed that Treasury Secretary Steven Mnuchin had proposed fresh negotiations. Speaking to FOX Business, Kudlow said the Trump administration has received signals that China’s leadership wishes to pursue talks.

On Sep 13, Chinese authorities welcomed the offer for fresh talks. Speaking at a news conference, Commerce Ministry spokesman, Gao Feng, said the two sides were deliberating over details for a fresh round of negotiations. Feng said: “The escalation of trade conflicts doesn't benefit either side's interests.”

Compulsions on Both Sides Could Resolve Conflict

This fresh effort to resolve what threatens to assume the proportions of a full-fledged trade war comes only a week after Trump warned that he would impose another $267 billion worth of tariffs. However, Trump and the Republicans will soon face a tough round of mid-term elections. Democrats are slated to hold the edge here and tariffs will feature as a major issue.

Already, the Trump administration is facing significant pressure from business and agricultural interest groups. They believe an agreement with China is in their best interest. Last month, several industry representatives testified to trade officials about how additional duties on Chinese products would affect them.

Also, this week, several industry organizations said they were part of a lobbying campaign named Tariffs Hurt the Heartland, which is opposed to the imposition of Trump’s tariffs. Meanwhile, China faces even more serious challenges.

China’s equity markets are already bearing the brunt of U.S. tariffs. Its economy appears fragile and may not be prepared to survive such a trade conflict. Though its government remains opposed to the structural changes Trump is pressing for, it may be forced to negotiate, considering the extent of its domestic compulsions.

Our Choices

Fresh trade negotiations between the United States and China are likely to alleviate tensions on both sides. Industries on both sides have been harmed by the conflict and would only benefit from meaningful talks. The biggest beneficiary on the American side would be the manufacturing sector.

Not only do such companies have significant Chinese investments, they have also suffered from the tariffs imposed on Chinese inputs. With negotiations likely to commence shortly, it makes sense to add manufacturing stocks to your portfolios. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Caterpillar, Inc. CAT, which is an excavator and earth-moving manufacturing company has more than 20 facilities in China.

Caterpillar has a VGM Score of B. The company has expected earnings growth of 69.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.4% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pentair plc PNR delivers a comprehensive range of smart, sustainable water solutions to homes, business and industry globally.

Pentair has a Zacks Rank #2 (Buy) and VGM Score of B.

Avery Dennison Corporation AVY produces pressure-sensitive materials, and a variety of tickets, tags, labels and other converted products.

Avery Dennison carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 21.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.5% over the last 60 days.

GrafTech International Ltd. EAF manufactures and provides natural and synthetic graphite and carbon based products and services.

GrafTech International carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 5.4% over the last 60 days.

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