Safety in the stock market‘s hard to find. But the US retreating from its plans to impose tariffs on goods from various trading partners might make investors start flooding back into equities.
Since the ‘Liberation Day’ news, various announcements of suspensions or exemptions have caused share prices to rise. I’ve been buying shares for my own portfolio throughout the volatility, but investors do need to be careful.
What’s been going on?
Exactly what’s caused the change of direction from the US government is hard to say. Some think this was the plan all along – the tariff regime was never realistic, but a negotiating move.
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Others think the reaction of the markets has been a significant factor. Over the last 10 days, the yield on 10-year US government bonds has gone from below 4% to above 4.5%.
That might not seem like a big move, but it amounts to a 10% increase in borrowing costs. And that yield’s towards the upper end of where it has been over the last 20 years.
Investors can make up their own minds about what’s been going on. But those – like me – who aren’t fully convinced need to work out what to do at the moment.
Temporary relief
The 90-day suspension of tariffs on non-retaliatory countries and the exemption of certain products from China from import taxes have sent share prices higher. But both are temporary.
In other words, if nothing happens, things could revert back to where they were a week ago. And I think if something does happen, it’s as likely to be negative as positive. So I wouldn’t be at all surprised to see more volatility ahead.
Of course, whatever caused the recent recovery – the nuances of four-dimensional chess or the realities of the bond market – might do so again. So there’s plenty to factor in.
Be careful
One stock I think looks risky at the moment is Spectris (LSE:SXS). It’s a supplier of high-tech equipment used in precision manufacturing – a lot of which happens in China.
While there’s a lot of uncertainty, one thing I think is clear is the US is particularly hostile towards China. And that’s a risk for a company that does 16% of its business in the country.
There might however, also be a long-term opportunity. The stock comes with a dividend yield above 4% and around 35 years of consecutive dividend increases.
Nonetheless, I’m worried – the firm generated £44m in free cash flow last year and paid out almost twice this in dividends, by increasing its debt. That’s not sustainable over the long term.
Ups and downs
The tension between the US and its trading partners has eased somewhat, but this could still turn around very quickly. And it’s important to think about what this means for businesses.
Spectris operates in over 30 countries, so it might not be the end of the world for the firm if manufacturing shifts away from China. But it’s always important to think about the risks and that hasn’t changed.
I think investors need to be very careful in the stock market right now. The situation needs some careful thought, but I’m convinced there are still opportunities.
