US fund managers brace for full-on trade war

Commerce conflict likely to push inflation higher, impacting smaller firms

Investors’ fears of an all-out trade war between the US and China is prompting US stock fund managers to hunt for companies that can easily pass on higher costs to their consumers.

So far, domestic small-tomid-cap companies that get most of their revenues at home have weathered prospects of higher trade costs the most, with the Russell 2000 Index of smaller companies up 2.8 percent for the year, nearly double the 1.5 percent gain in the larger-cap and more internationally exposed S&P 500 index over the same time.

Yet fund managers from firms including Villere & Co, Hodges Capital and BMO Global Asset Management say that a trade war would likely push inflation higher, eating into the margins of even those domestic companies that get no revenues overseas.

Instead of focusing on the geographic source of revenues, these managers say that they are targeting firms that have dominant niches or intellectual property that will allow them to protect or even expand their margins at a time of rising costs.

“We’re focusing on the companies that regardless of the type of inflation – whether it’s commodities or trade or something else – can pass on those costs because they have some sort of structural advantage,” said Eric Marshall, a portfolio manager at Dallas-based Hodges Capital.

Marshall has been adding to his position in Texas Instruments Inc, for example, because the firm’s chips are used in high-end, high-demand products such as iPhones and self-driving cars.

“They have the better mousetrap and if there are additional tariffs to bring its products back then they will be well positioned to pass those costs on,” he said.

A trade war between China and the US would lop 0.7 percent off the US GDP and push inflation up by 0.1 percent, according to estimates from MSCI. That, in turn, would sink US stocks by about 5 percent, the firm estimates, a fall it says may already be priced into the market. Should other countries also raise tariffs, then US stocks could drop by another 10 percent.