The United States and China are at a deadlock over trade negotiations as President Trump continues to demand concrete changes to Chinese laws, while Beijing has refused the same. The tussle between the superpowers is far from over, not boding well for corporates as well as the economy.  

In such a scenario, investing in low-beta defensive companies seems prudent. Such stocks provide risk-adjusted returns, consistent dividend, and steady earnings, regardless of the state of the equity market.

Investors Brace for China Retaliation to U.S. Tariffs

Investors are worried about Trump’s chief economic advisor’s warning that China might retaliate against the higher tariffs Washington imposed last week. Trade negotiations between the world’s largest economies couldn’t end in a deal, even though Treasury Secretary Steven Mnuchin said that the talks were “constructive.”

China’s Commerce Ministry had warned that they would retaliate by imposing "necessary countermeasures" if higher tariffs were put into effect. Unfortunately, tariffs on Chinese goods were raised to 25% from 10%.

The situation may worsen as Trump threatened to levy tariffs on all Chinese goods with America. And this means imposing tariffs on the remaining $325-billion worth of Chinese products. His moves will invariably affect more than 5,000 China-made products, including fresh and frozen foods, chemicals, textiles, metalwork, building materials, electronics, and consumer goods.

Trump said that Beijing “broke the deal.” Trump criticized trade imbalances between the countries. Protection of intellectual property rights, by the way, continues to be a bone of contention for the economies. Beijing, however, remained defiant. The People’s Daily, a newspaper controlled by the Chinese ruling Communist Party said that “at no time will China forfeit the country’s respect, and no one should expect China to swallow bitter fruit that harms its core interests.”

Why U.S.-China Trade War is Damaging

Investors are worried that the trade war might destabilize an already-slowing global economy. The International Monetary Fund, in the meantime, warned a tariff war would pose a “threat to the global economy.”

Thanks to higher tariffs, Chinese goods will surely become more costly compared to U.S. products. And if consumers start buying U.S. products, eventually prices will move north. So, in both cases, U.S. consumers will bear the cost.

By the way, higher prices of imported goods generally lead to an uptick in inflation. Trump did hope that Americans will purchase more U.S. products, and more jobs will be created to fulfill the growing demand. But, with higher prices, consumers will invariably reduce consumption and the firms won’t be able to create new jobs.

China won’t be spared either. The country uses the dollars it earns from exports to buy goods across the globe. But, due to the trade tensions, Chinese exports to the United States fell 18.5% to $31.2 billion in March 2019. And if this continues, China won’t have many dollars to pay for its imports.

Sell in May and Go Away

Stocks are, in fact, bleeding this month. The popular axiom “sell in May and go away” has always encouraged investors to sell stock holdings in the month to avoid getting affected by the seasonal decline in equity markets.

The strategy also advises getting back into the equity markets in November, thereby evading the typical volatile May-October period. Historically, stocks have underperformed in the six-month period commencing May and ending in October, compared to the six-month period from November to April.

Mostly, lower trading volumes in the summer season and substantial increase in investment during the winter months are cited as the main reasons for this discrepancy in returns.

How to Prepare for the Pullback?

As markets seem to be plagued by widespread uncertainty, defensive stocks seem to be the safest investment option. Defense stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand, irrespective of market volatility, and such names include companies from the utilities and consumer staples sectors.

Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaltered during market gyrations.

5 Solid Choices

We have, thus, selected five solid stocks from the aforesaid defensive sectors that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy). Further, only low-beta stocks from such defensive companies have been selected. After all, low-beta stocks are the ones that are less correlated to the index and tend to be less volatile. In this case, a low beta ranges from 0 to 1.

Middlesex Water Company (MSEX - Free Report) owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated. The company currently has a Zacks Rank 1 and a beta of 0.43. The Zacks Consensus Estimate for its current year earnings has increased 5.9% over the past 60 days. The stock’s expected earnings growth rates for the current quarter and year are a solid 5.8% and 10.7%, respectively.

Consolidated Communications Holdings, Inc. (CNSL - Free Report) provides telecommunications services to business and residential customers in the United States. The company currently has a Zacks Rank 2 and a beta of 0.83. The Zacks Consensus Estimate for its current-year earnings increased 21% over the past 60 days. The stock’s expected earnings growth rates for the current and next quarter are a superb 20% and 33.3%, respectively.

ONE Gas, Inc. (OGS - Free Report) operates as a regulated natural gas distribution utility company in the United States. The company currently has a Zacks Rank 2 and a beta of 0.35. The Zacks Consensus Estimate for its current-year earnings has risen 0.9% over the past 60 days. The stock’s expected earnings growth rate for the current and next quarter are a promising 7.7% and 12.9%, respectively.

The Chefs' Warehouse, Inc. (CHEF - Free Report) distributes specialty food products in the United States and Canada. The company currently has a Zacks Rank 1 and a beta of 0.81. The Zacks Consensus Estimate for its current-year earnings has climbed 6.2% over the past 60 days. The stock’s expected earnings growth rates for the current quarter and year are encouraging 29.2% and 32.1%, respectively.

General Mills, Inc. (GIS - Free Report) manufactures and markets branded consumer foods. The company currently has a Zacks Rank 2 and a beta of 0.77. The Zacks Consensus Estimate for its current-year earnings has increased 1.9% over the past 60 days. The stock’s expected earnings growth rate for the next quarter is a solid 11.3%.