Tariff Headlines: Seize Opportunities with a Thesis

Tariff concerns have created conversation opportunities with existing and prospective clients. Success is anchored to this fundamental tenet: “We get paid to have an opinion.”

Consider these four conversations where lacking clarity on­­—or conviction in—your opinion could lead to missed opportunities:

• Making first encounters count. When your answer to “what are you telling your clients right now” sounds like a committee of six economists: “on the one hand this, on the other hand that.”
• Inspiring prospective clients to move forward. Meetings end with prospective clients saying, “we are going to wait for things to settle down.”
• Calming current client concerns. Clients hang up the phone feeling more confused than prior to your call.
• Capturing referable moments. Clients find themselves in conversations with friends about the market, yet these referable moments are squandered due a lack of clarity and conviction in your latest client update call.

Capitalize on these opportunities and follow our four best practices of great thesis articulation: Be timely, be pithy, use sound bites that are easy to remember and connect the dots between your financial beliefs and the advice you deliver to clients. 

For some inspiration, consider head of Global Opportunity at Morgan Stanley Investment Management Kristian Heugh’s current thesis: “Tariff headlines mask insulated international opportunities.” Below is an excerpt from our conversation:

David: “Over the years, you have spoken of the importance of brand power. Do strong brands create insulated opportunities given today’s macro uncertainties?”

Kristian: “Absolutely. Companies with strong brands or unique products are better positioned to exert pricing power—particularly in an uncertain environment and when companies may be faced with higher costs related to trade friction. The ability to pass on costs to the customer helps preserve company profitability. Without a competitive advantage, such as brand power, it’s much more unlikely the company would be able to do so effectively.”

David: “Apart from a strong brand or unique offering, are there other ways for investors to avoid the effects of potentially structurally higher tariffs globally?”

Kristian: “Services, versus goods, are more challenging to implement a tariff on, and therefore these companies are less likely to feel the impact of current dynamics. Economies tend to be more service oriented than the index, so structurally we’ve invested more in services than products over time, helping insulate our portfolios in an environment with higher tariffs. While subsequent risk could come through, for example a higher regulatory burden, we haven’t seen this in any meaningful way yet.”    

David: “Is it difficult to find international companies that are primarily driven by domestic demand?” 

Kristian: “This is an important aspect of our research. Tariff headlines mask insulated international opportunities. International companies driven by domestic demand are less likely to be affected by trade policies instituted by the U.S. Whereas, companies based outside the U.S. with U.S. supply chains or revenue exposure, or U.S. companies with international supply chains and revenue exposure, are more at risk to disruption given their cross-border nature. A company based in Latin America serving Latin American clients for example, would not feel first-order impacts from American trade policy. Through our deep dive, bottom-up process, we find unique companies internationally that don’t have similar counterparts in the U.S.” 

David: “To what degree does the financial strength of a company influence their degree of insulation in these times?”

Kristian: “Companies with robust financial positions—positive free cash flow, low debt on their balance sheets and high returns on invested capital—are best positioned to control their own destiny and weather periods of uncertainty. Moreover, financially strong companies are positioned to take advantage of competitors’ weakness during periods of volatility and can ultimately gain increased share.”

Bottom Line: Seize the opportunities presented by tariff headlines to crystallize and communicate your views with a well-crafted thesis.