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Goldman Sachs recommends two stock-picking strategies amid the US-China trade war

Scott Gamm

As trade tensions between the U.S. and China heat up with the market bracing for a new round of tariffs on Sept. 1, Goldman Sachs strategists are recommending a few strategies for asset managers to navigate the uncertainty.

“Focus on services-providing rather than goods-producing companies,” the analysts wrote, led by chief U.S. equity strategist David Kostin, in a note to clients. “The U.S.-China trade dispute has had a more negative impact on the fundamentals and share price performance of goods-producing companies compared with services-providing firms.”

Put simply, services companies have less exposure to the margin crimping tariffs.

“Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-U.S. sales exposure than goods firms,” the analysts wrote.

Within services, Goldman Sachs highlights two areas: software services and media and entertainment. According to Goldman Sachs, the biggest stocks in the services category include: Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Berkshire Hathaway (BRK.B), Facebook (FB), JPMorgan (JPM), Visa (V) and Walmart (WMT).

Berkshire Hathaway CEO Warren Buffett and JPMorgan Chase CEO Jamie Dimon. (Getty Images)

Labor costs

As Yahoo Finance reported last week, Goldman Sachs now expects 75bp worth of rate cuts in 2019, including the one from late July.

“Modest growth combined with falling interest rates should put continued upward pressure on wages that have already accelerated to the fastest pace this cycle,” the analysts wrote.

With that, another strategy Goldman recommends to hedge against trade woes is owning “low vs. high labor cost stocks.”

They point to several stocks with low labor costs that are also service-focused companies, including: Netflix (NFLX), PayPal (PYPL), Cigna (CI), Aflac (AFL) and McKesson (MCK).

The recent escalation of the trade war with China has sparked stock market volatility over the past week. The S&P 500 (^GSPC) is down 4% from its all-time closing high on July 26.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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