Why MLPs Could Be Pressured
There has also been some chatter in the markets that master limited partnerships (MLPs) could come under pressure on the heels of these tariffs because of their industry reliance on steel imports.
ETPs such as the Alerian MLP ETF (AMLP) or the J.P. Morgan Alerian MLP Index ETN (AMJ) are investment products that could be impacted. For example, almost two-thirds of the constituents within the Alerian MLP Index (AMZ) (which AMJ tracks) comprises pipeline companies.
However, we do not believe this will result in a material adverse effect for that sector. A February 2018 MLP market update by Goldman Sachs Asset Management highlights that, while approximately half of the steel used in pipelines is imported, a significant portion of this steel comes from Canada and Mexico.
While both countries remain exempt from the proposed tariffs, this could change as the NAFTA negotiations continue. Moreover, only 56% of U.S. pipelines primarily comprise steel.
Goldman argues that the modest cost inflation could be offset by charging higher rates to pipeline customers, and that the expectation the sector’s CAPEX will decline by over 50% through 2020, according to Wells Fargo, further refutes the idea that tariffs will adversely affect these markets.
It is safe to assume market volatility will persist, especially since the 15-day window for U.S. firms to win exemptions from this mandate is quickly closing. Either way, we believe the best course is to continue to monitor the situation closely and avoid making kneejerk investment decisions based on headlines alone.
At the time of writing, ClearRock clients currently owned EEM, AMLP and AMJ. Wes Flanigan is a senior research analyst at ClearRock, an SEC-registered investment advisor with offices in San Francisco and Sun Valley, Idaho. Contact: [email protected]. For a full list of disclosures, please click here.