As markets react to the escalation of trade tensions between the U.S. and China, investors are searching for ways to insulate their portfolios.

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The best approach, says Natalie Taylor, vice-president and portfolio manager at CIBC Asset Management, is to find companies that will participate in the upside of economic growth while offering downside protection.

“Unfortunately, the systemic risk that we’re talking about, of a meaningful decline in global growth, is difficult to avoid entirely and difficult to call with any accuracy because outcomes don’t often follow from logic,” she said in a May 24 interview.

A deal could be reached unexpectedly, for example, or government stimulus could be introduced to soften the impact on companies, said Taylor, leading equity markets higher.

The U.S.-China trade war could cause a 0.5% to 1% hit to global growth, she said, with additional damage to business confidence potentially causing investment pullback.

“This is particularly worrisome to me given that we are in the later stages of a recovery, and there’s limited slack in the economy to absorb such a shock,” said Taylor, who works on the CIBC Dividend Income Fund.

A Unigestion report from May 28 said the market is discounting the impact of increased tariffs and other trade measures. While the MSCI All Country World Index is down about 4% since early May, “a significant escalation of the trade war would trim about 9% from global equities, mostly due to an expansion in risk premia,” the report said.

That’s why company characteristics become more important. At this point in the economic cycle, Taylor said her main concern is leverage.

“High leverage can be crippling in normal times,” she said. “It can be devastating in a downturn as financial flexibility is severely impacted.”

She’s also looking for low valuations, companies with hard assets that provide downside protection, and those that generate strong cash flow.

Three companies she’s focused on are Westshore Terminals, Kinder Morgan Canada and Loblaw.

For Westshore, a Vancouver coal-shipping terminal, concerns about lower demand are overdone, Taylor said.

“We think there are hard assets providing downside support and, in addition, no leverage on the balance sheet, which provides a lot of flexibility in the event that something unforeseen happens,” she said.

Westshore’s stock has recovered in recent weeks after dipping to $18.35 in March. This week it’s trading above $22.

For similar reasons, Taylor likes pipeline company Kinder Morgan Canada, from whom the federal government purchased the Trans Mountain pipeline last year for $4.5 billion.

Kinder Morgan Canada said last month that it would remain a standalone company following a strategic review that considered a sale. The stock sank following the May 9 announcement, from above $15 to under $12 this week.

“There’s been an overreaction in the share price,” Taylor said, and the company has low debt and ample infrastructure assets.

Grocery chain Loblaws is a good defensive stock with possible upside, she said. The company has invested in its click-and-collect grocery pickup, and its strategically placed stores are a strong asset, she said.

Loblaw stock rose last month to above $70. It started the year trading at $61.05.

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