Trade tariffs are a short-term source of volatility in the market, says portfolio manager Peter Hardy, sometimes leading to reactions greater than the actual impact on companies.
Tariffs have created tensions between many global trading partners, with the U.S. and China engaged in retaliatory measures, and the U.S. maintaining steel and aluminum tariffs on Canada and Mexico despite signing a new North American trade agreement.
The U.K.’s exit from the European Union will also lead to a new layer of tariffs between trading partners.
“While the market had been sloughing that off, or not acknowledging it for previous quarters, it came to bear in the fourth quarter,” said Hardy, senior client portfolio manager of global value strategies at American Century Investments, in a Jan. 18 interview.
“The stock reactions of many of the companies we follow have largely been greater than, we believe, the economic reality of the tariffs.”
Hardy said many companies in the industrial sector, for example, have sold off due to tariff concerns. As a result, those companies are more attractive.
“When we go company-by-company, the impacts are far less severe than the stock reactions due to the fact that [the] long-term return potential of these businesses hasn’t changed,” said Hardy, whose team manages the Renaissance U.S. Equity Income Fund.
“The reason we feel that way is companies can pass on increased input costs to their clients, so their product prices will go up, or they can eventually relocate facilities from, say, China, back to a better locale, like Canada.”
The key is to look at the entire business cycle of a company, he said. Instead of valuing the company at its peak, investors should be making decisions based on a company’s “normalized return potential.”
Investors should also stress-test a company’s business model, Hardy said, applying appropriate valuation to downside returns as well.
“We’re doing our best to determine economic reality or the actual cashflow impacts to our businesses, as opposed to reacting to market fervour or speculating on how something will potentially look on stock prices,” he said. “So we’re looking at business fundamentals.”
He added, “While there are inflationary pressures and global growth concerns that are part of this tariff or trade-war issue, the company-specific impacts are likely less muted due to the switching and passing on of costs.”
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