The Trouble with Tariffs
The Trouble with Tariffs
What are the key themes likely to shape markets in 2019?
We believe earnings growth drives stock performance, so we are thinking carefully about the factors that could impact profits in 2019. Global trade is one important factor. Should tariffs lead to an uptick in inflation, we believe corporate profit margins could come under pressure. As always, consumer confidence and willingness to spend will also determine earnings growth in 2019. Wage growth has improved recently in the U.S., and as long as we continue to see higher wages and tight labor markets we believe consumer spending should stay robust. However, if trade disputes or tariffs impinge too much on corporate earnings and companies have to lay off employees, that could hurt consumer confidence and spending. It’s something we’re cognizant of and watching.
Where do you see the most important opportunities and risks within your asset class?
We remain focused on finding companies that are benefiting from the shift to digital, including those firms selling the software and hardware to help enable the transition. We also like companies that have the scale to invest in technology and, as a result, reap efficiencies from these new applications and systems. Many transportation businesses, for example, have used technology to manage routes better and anticipate when a truck, train or plane needs maintenance. A number of companies also continue to reinvent themselves, including large pharmaceutical organizations, which are developing advanced therapies for complex diseases such as cancer and diabetes. Many of these legacy players have been able to add to revenues even as other products lose patent protection. On the other hand, these types of investments could be curbed by potential costs associated with trade wars or trade restrictions. It’s probably what we’re most concerned about for the near term.
How have your experiences in 2018 shifted your approach or outlook for 2019?
Going into 2018, we were very bullish on U.S. equities as interest rates were still relatively low and we were optimistic about the benefits that tax reform would bring to economic growth. Today, the U.S. economy remains healthy, but interest rates have climbed and equities face new risks, such as tariffs. So although we continue to see many tailwinds for equities in 2019, we believe more defensive positioning could be warranted, especially until a trade resolution is reached. To that end, we remain focused on companies with strong free cash flows and will closely monitor our holdings in the industrials sector, which may be especially sensitive to trade risk.
"Today, the U.S. economy remains healthy, but interest rates have climbed and equities face new risks, such as tariffs. So although we continue to see many tailwinds for equities in 2019, we believe more defensive positioning could be warranted, especially until a trade resolution is reached." – Jeremiah Buckley, CFA, Portfolio Manager
Staying Focused on Secular Growth
As interest rates and inflation pressures climb, Portfolio Manager Doug Rao says it is becoming all the more important to focus on companies with secular tailwinds, pricing power and competitive advantages.
All Eyes on the Fed
As the Fed risks executing on an overly aggressive tightening path, and the economic and credit cycles continue to progress, Portfolio Manager Seth Meyer highlights the importance of a nimble approach, in which capital can be dynamically allocated to the strongest risk-adjusted opportunities, regardless of fixed income asset class.