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Tariffs, Supply Chain Issues Could Create Greater Uncertainty Than Analysts Thought

Trade has grown increasingly tenuous in recent weeks, and the hope ahead of the G20 Leaders’ Summit in Buenos Aires later this week, is that leaders can come to a sort of ceasefire on the trade wars.

But so far, the scenario doesn’t seem a likely one as both President Trump and Chinese President Xi Jinping—the two powerhouses behind the lion’s share of current global trade troubles—have shown no signs of standing down. And according to a new report from the World Trade Organization, the amount of trade covered by import-restrictive measures—including things like tariffs—has increased six-fold since 2012.

Members of the G20, a collection of the world’s most advanced economies, including the U.S., China, Canada, the U.K. and European Union, will meet this week to discuss economic, financial and political cooperation. Representing 85 percent of global GDP, 75 percent of international trade and 66 percent of the world population, the group could make substantial moves to collaborate were its participants so inclined.

According to analysts at Cowen and Company, what becomes of tariffs at the G20 meeting will likely be the biggest driver of performance for the coming year.

In light of the currently in place 10 percent tariffs on certain imports from China and the threatened increase to 25 percent in just 36 days (Jan. 1), plus the price increases those tariffs purport, there’s a host of variables that could add to market uncertainty in the coming months.

“We suspect tariff and supply chain issues could create uncertainty over initial guidance for 2019 across the entire sector, which is likely to limit near-term valuation multiple expansion and create volatility,” Cowen and Company said in a note released Monday. “Additionally, modeling supply chain disruptions, ‘inspections’ and potential fines on American brands operating in China adds another layer of complexity.”

And how things shake out will depend largely on companies’ exposure to China sourcing.

Companies like Carter’s, which sources 33 percent of its product from China, G-III Apparel Group, which sources 65 percent from China, and Skechers, which still brings in 60 percent of its product from China, face the most risk.

Nike, VF Corp., Hanesbrands and Under Armour, however, “are much less exposed to China sourcing,” Cowen said.

Talk of the G20 and what could result from it was enough to overshadow talk of Black Friday sales at retail.

“G20 meeting and tariff outcome outweighs weekend sales banter given the implications for sentiment, uncertainty and initial 2019 guidance,” Cowen said.