Investing.com -- Finding winners in a trade war is challenging as economic activity may take a hit, inflation could get a new lease of life and China-sensitive sectors like IT hardware come under pressure, but it isn't all doom and gloom, Morgan Stanley (NYSE:MS) says pointing to possible tailwinds to US industrials and metals as sectors that are best equipped to navigate a trade war storm.
Over the longer term, tariffs are a positive for US industrials, according to Morgan Stanley's US Multi-Industry analyst Chris Snyder, who sees tariff-driven changes to the cost of global supply chains, better positioning the US to take "share of global manufacturing investment."
US industrials companies are expected to generate a normalized margin on tariffs, allowing the group to benefit and profit from higher prices flowing through the system, , Snyder added, flagging companies such as Trane Technologies plc (NYSE:TT), Vertiv Holdings Co (NYSE:VRT), Johnson Controls International PLC (NYSE:JCI), Eaton Corporation PLC (NYSE:ETN), and Acuity Brands Inc (NYSE:AYI) as "best positioned to navigate an environment with increased tariffs."
In the metals sector, as the U.S. is a net importer of copper, aluminum and steel, higher import tariffs mean higher domestic prices for local buyers, "particularly in copper and aluminum, given the shortage of domestic supply," Morgan Stanley said.
The uptick in prices from potential tariffs are likely to benefit Alcoa (NYSE:AA)'s US smelter's, which "would be able to capture such elevated premiums, and the company's other smelters selling into the US would be able to pass tariffs on to customers via the higher Midwest premium," it added. Freeport's North America business, would "benefit from tariffs as we expect higher prices to get passed on to customers given the lack of a domestic supply for copper buyers."
While some sectors stand to gain from potential tariffs, others face significant challenges. The technology hardware sector, in particular, appears vulnerable to the proposed import levies.
With the majority of hardware production remaining in China, US IT Hardware faces a "moderate EPS headwind from new 10% import tariffs," according to Erik Woodring, US IT Hardware analyst at Morgan Stanley.
China produces around 20% of U.S. IT hardware, tariffs could amount to about a 2.5% EPS headwind on average for companies with over 50% of revenues captured in the US.
The auto industry, meanwhile, faces significant cost hikes from tariffs, particularly companies with substantial production in Mexico and Canada such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F), Adam Jonas, US Autos and Shared Mobility analyst said in a recent note.
While some sectors may find opportunities amidst the challenges, investors should remain cautious given the complex and evolving nature of trade tensions, Morgan Stanley said, expecting "news around tariffs to remain fluid."