Skip to main content

Positioning Ahead of the Trade Deal: Two Areas I Like, One I Don't

The potential U.S.-China trade deal remains the single biggest event facing the market.
  • Author:
  • Publish date:
Comments

I continue to view the potential U.S.-China trade deal as the single biggest event facing the market.

Here is the timeline I'm using:

  • No trade deal within the next two to three weeks, and equity prices will fall sharply. S&P 2600.
  • Negotiations fall apart (unlikely but possible). S&P 2200.
  • If we get a trade deal, the initial market reaction will be to "sell the news." Whether I buy the dip will depend on what China agrees to purchase. The more China agrees to buy that spurs growth and investment in the U.S., the better (I view liquified natural gas (LNG) as a litmus test because any strong commitment from China will result in large infrastructure spending here and abroad).
  • Then we will need to focus on how we deal with other countries: Rolling back steel tariffs globally would be a sign that we are pausing our trade wars. S&P 3000. Approving the USMCA, which I erroneously keep referring to as NAFTA 2 (I know I'm wrong, but I can't help myself) would also be a good signal. S&P 3100. Turning around and slapping tariffs on Europe or Asia outside of China would be the worst of all outcomes as it would indicate that we don't negotiate in good faith and are purely reactive rather than having a cohesive strategy. S&P 2200.

With that timeline driving my investment thesis, here is what I like and what I would avoid:

MLPs

Master limited partnerships (MLPs) have stabilized of late, but I think they have more upside from here for several reasons:

  1. Domestic energy production will gain traction, especially if China agrees to buy LNG. MLPs will be winners in that scenario.
  2. When I was in Houston in March, I was (pleasantly) surprised how strongly some companies advocated for their MLP subsidiaries and/or structures. While I am aware that companies are incentivized to pitch that, the arguments themselves seemed compelling and I felt there was a lot of conviction backing those pitches.
  3. Some extremely smart bond investors are loading up on MLP stocks. They think there will be expansion, which won't be great for the debt (they need to raise more money) but it will increase their stock prices.
  4. As the global yield chase continues, MLPs will gain traction. MLPs have suffered because the tax structure is somewhat more complex (nothing that decent tax software can't handle, let alone an accountant) and they don't have a "good" ETF (largely because of the tax structure). The chase for yield will be on for investment advisors to overcome these hurdles and select specific MLPs to buy.

BDCs

Leveraged loans, basically what business development companies (BDCs) invest in, have underperformed high-yield bonds, capping the returns on BDCs. I think the underlying loans are appropriately priced here given recent fund flows and these companies aren't particularly sensitive to interest-rate moves (they own floating rate debt, but finance that debt with floating rate loans, making them neutral to interest rate risk).

VanEck Vectors BDC Income ETF (BIZD) should do well.

Utilities

Sell utilities. They have benefited almost in lockstep with the change in bond yields.

If bond yields are near their lowest levels for now, then these yields should increase, which will limit the upside of utilities. I think both the Fed and the Treasury Department will attempt to raise longer-term interest rates because the flat yield curves are causing investors and companies to be cautious.

If China does become a big buyer of LNG, I would expect energy prices to rise, which in conjunction with potentially higher yields will hit utilities or the ETFs such as Utilities Select Sector SPDR Fund (XLU) .

How Much Money Will I Need to Retire?

Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert "Mr. Retirement" Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.

At the time of publication, Tchir had no positions in any securities mentioned.