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or the 2011 toppling of Muammar Qaddafi
in Libya—stock markets typically recover
within five days. Still, geopolitics become a
financial threat when they create stressful
long-term conditions that hurt companies’
profits and discourage investment. That’s why,
of all the items on the global-strife laundry
list, analysts worry most about trade wars.
Most economists agree that restrictive tarifs
hurt growth—and could do more damage
today, when more companies rely on global
sales and supply chains to sustain profits. The
restrictions often backfire on the industries
they’re designed to protect: In the 1980s, for
example, the U.S. placed tarifs on steel from
Japan, but 10 of the 11 largest U.S. steel producers
saw negative equity returns from 1982
to 1986, according to the Brookings Institution.
The current environment has an added
wrinkle, notes Tina Fordham, chief global
political analyst at Citi: Countries have considered
microtargeting sanctions at specific companies
or subsectors. It isn’t hard to envision,
for example, China retaliating against Trump
administration tarifs by punishing Boeing,
which got 13% of its sales from China last year.
SHRUGGINGOFFSCARYNEWS?
A recent study by Federal Reserve economists suggests that
geopolitical conflict seldom correlates with prolonged slumps
in stock prices. Trade wars, however, are uncharted territory.
600%
400
200
0
MONTHLY CHANGE IN “GPR” INDEX
(Occurrence of words related to geopolitical
tensions in major international newspapers)
S&P 500
2000 2005 2010 MAY 2018
SOURCES: CALDARA AND IACOVIELLO, MEASURING GEOPOLITICAL RISK; S&P GLOBAL
WHAT’S THE BEST WAY TO ADJUST to such uncertainty? Historically, the
industries that have held up best amid geopolitical risk in general
and trade tensions in particular are defense, oil, and consumer
staples. Defense stocks look pricey these days, however. Over the
past five years, they have risen 20% annually, compared with 11%
for the S&P 500, as investors sought to cash in on a growing Pentagon
budget. “All the good news is priced in,” says Chris Higgins
of Morningstar.
The oil patch looks more promising. Times of turmoil tend to
boost crude prices, to the benefit of big U.S. producers—of which
the best positioned right now is Chevron (CVX, $123). The company
endured criticism for recent investments in new production,
particularly in Australia, but many of those wells are coming
online just in time to capitalize on rising prices. Then there’s
Texas’s Permian Basin, whose stunning energy boom Jefrey Ball
depicted in ourFortune 500 issue (June 1). Chevron’s production
there has risen from less than 150,000 barrels a day in early 2017
to about 250,000 today, en route to a planned 650,000 by 2022.
Those capabilities, along with an enviable balance sheet—Chevron
generated $20.5 billion in cash flow from operations in 2017—
make the stock about 25% undervalued today, assuming an oil
price of $65 a barrel, says Jeferies analyst Jason Gammel.
Kinder Morgan (KMI, $17), a huge operator of pipelines and
terminals, doesn’t benefit immediately from rising oil prices. But
as the surge encourages producers to dig more wells and invest in
new projects, they’ll sign more of the transportation contracts that
account for most of Kinder’s revenue. The
company’s $37 billion debt load, a by-product
of an infrastructure building spree, has scared
some investors away: It trades at a 35%
discount to peers in pipeline and “midstream”
energy based on estimated 2019 distributable
cash flow, says Raymond James’s Darren
Horowitz. But its stable income and dominant
position in energy infrastructure make it an
attractive long-term play.
No amount of global angst will make you
stop purchasing food or toilet paper, and
analysts expect consumer-staples stocks to
benefit if trade tensions hurt other industries.
Investors haven’t been impressed so far by
aggressive cost cutting at Kraft Heinz (KHC,
$58); shares in the packaged-foods giant have
fallen more than 35% since rival Unilever
rejected its takeover bid in February 2017.
But the company now boasts the best profit
www.t.me/velarch_official
margins among its food peers, says Edward
Jones analyst Brittany Weissman. If Kraft
Heinz can start growing revenue again, “the
stock will be rewarded for that,” Weissman
says. And even if not, its healthy margins
could make it look like a haven when
investors scurry for safety.
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FORTUNE.COM
// JULY.1.18
GRAPHIC BY NICOLAS RAPP