3 Contrarian Ideas to Navigate the Escalating Trade War
It was about 2 a.m.
Our clothes were heavy from rain and sweat.
My buddies and I were in sole possession of last place in the 2014 Nocturnal Challenge Adventure Race — a five-hour race I’d agreed to at the last minute.
If we were going to catch up, we’d have to do something different from the rest.
We decided to take a risk. We made a shortcut through northern Florida’s pine-tree-and-palmetto forest with nothing but a map and a couple of headlamps.
The underbrush was thick, dark and unpredictable. My internal compass helped more than my headlamp. By the time we reconnected with the trail, we had a comfortable lead because we braved a path that others would not.
Today, many investors are stepping out of the race. They prefer to avoid increased risk and uncertainty coming from the trade war.
U.S. and Chinese companies have a dim view of what’s coming. Companies in both countries have already rerouted over half of tariffed goods in this trade war.
Markets have fallen and investors are scared the global economy is going to suffer.
But you can turn the risk into reward.
Investors can find ways to make money today, but they must be different from everyone else.
Here are three contrarian trade ideas to help you stay a step ahead however this trade war plays out.
No. 1: A Good Reason to Buy a “Hated” Currency
To learn more about these three contrarian ways to profit in the market’s volatility, watch my video below.
There’s an unlikely investment set to perform well … because it has performed so poorly the last 16 months.
I’m talking about the euro.
The eurozone’s common currency has been at the mercy of its debt-laden countries, stagnant economies, negative interest rates and something called “Brexit.”
Analysts at JPMorgan Chase & Co. think the trade war will put more pressure on the euro.
Years ago, I was bearish. I kept betting against the euro, and I kept losing.
I never expected the euro could climb. Neither could most analysts.
Like today, investors seeking out high returns borrowed euros to fund investments in dollars and emerging-market currencies.
But when investors got scared about those investments, they closed them out. And they took the money from the sale to “cover” — or pay back — the euros they borrowed.
A strong flight to safety — something like a protracted trade war — can generate a strong rally in the euro when investors cover.
If investors stay scared, you should consider buying the ProShares Ultra Euro ETF (NYSE: ULE).
This is a leveraged exchange-traded fund (ETF) designed to move twice as fast as the euro. This type of ETF is not an ideal product to hold for a long time. But when the euro rallies from an ongoing flight to safety, this ETF will jump by 12% to 20% in the weeks ahead.
No. 2: U.S. Treasurys Are Due for a Pullback
The value of the U.S. dollar rose when the value of the euro dropped.
Interest rates are part of the reason. More than half of eurozone governments’ debt has a negative yield. Conversely, the Federal Reserve was pushing short-term rates higher in the U.S.
But the market hasn’t played along.
U.S. Treasury prices are screaming higher.
That means rates on these securities are plunging since they move opposite of price.
Falling rates mean investors are worried about future economic growth potential.
Treasury rates will stay low if investors stay fearful. It’s a negative feedback loop.
The same thing happened in the fourth quarter of 2018 during the mini bear market in stocks.
Now, investors are convinced the Fed will cut rates twice in 2019.
That’s a bold wager since the Fed only recently stopped hiking rates.
Nevertheless, the rate cut sentiment is already priced into Treasurys, too.
So, despite the trade war risk, Treasurys are due for a pullback.
There’s an ETF that gives traders a way to play a decline in Treasury prices. The ProShares UltraShort 20+ Year Treasury ETF (NYSE: TBT) climbs twice as fast as long-term Treasury prices fall.
TBT will jump 15% as investors calm down and rethink the rush into Treasurys.
No. 3: A Late-Cycle Inflation Bet With the Basic Materials Sector
The basic materials sector, like Freeport-McMoRan Inc. and Nucor Corp., got crushed last month thanks to trade war escalation.
But that could change.
Walmart Inc.’s chief financial officer made comments about the trade war. Despite the company’s best efforts, he expects tariffs will increase prices customers will pay for products his stores sell.
Walmart imports 26% of its products from China. Most retailers import a much larger percentage.
Bottom line: Tariffs will push prices higher.
Still, many believe inflation is dead, never to return … except for some temporary price increases here and there.
Analysts and economists, however, agree we are in the late stage of the business cycle.
The materials sector is one of a few sectors that performs well during the late stage of the cycle because it’s typically characterized by rising prices.
In other words: Inflation may become more than just a trade war phenomenon.
This is a big-picture, contrarian trade idea. Basic materials is the most unloved sector in the stock market over the last 12 months.
But the trade war offers us a great chance to get in at a great price.
Consider buying the Materials Select Sector SPDR Fund (NYSE: XLB). It tracks an index of companies doing business in chemicals, metals, mining, paper products and construction materials.
To profit during times of volatility, I take educated risks others are afraid to take. These three ETFs are your contrarian maps to navigate the trade war’s uncertainty and capitalize on others’ fears.
Senior Analyst, Banyan Hill Publishing