Why this ASX 200 stock could provide protection from the trade war

There's one thing you can count on if a full-blown trade war erupts – government will step up on infrastructure spending to offset the slowdown. Here're some stocks that could benefit.

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Engineering construction group Downer EDI Limited (ASX: DOW) has chosen the wrong day to announce a $220 million contract.

The news couldn't save the Downer share price from the broader market sell-off with the stock falling 0.7% to $7.88 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index crashed 1%.

Most sectors have tumbled into the red as the trade war between the US and China intensified overnight with the Chinese slapping retaliatory tariffs on US imports in response to Donald Trump's move to increase the tax on US$200 billion of Chinese goods.

Stocks that are better insulated from the trade war

No stock is safe from an all-out trade war between the two economic giants as all risk assets will suffer from falling global trade, although the earnings of some companies are better insulated from the turmoil.

Downer is one that I believe will fit into this category and the new maintenance contract with New Zealand telco Chorus Ltd (ASX: CNU) underscores this belief. The two-year and nine-month contract is to provide field services for Chorus' network spanning most of the country.

Downer does not only provide maintenance services, it is also involved in infrastructure construction.

There is an infrastructure building boom unfolding in Australia and many other countries, and you can bet that governments will step up spending on such projects to offset a protracted downturn in the economy.

No safe harbour from the short-term volatility

This doesn't mean the Downer share price won't suffer whiplash in the short-term from the share market turmoil, but at least it's earnings should hold up better than other cyclical growth stocks.

Downer isn't the only one exposed to infrastructure construction. Companies like BlueScope Steel Limited (ASX: BSL) and James Hardie Industries plc (ASX: JHX) are also leveraged to this area.

What's more, even if a full-blown trade war is averted and global growth holds up, the operating environment for stocks exposed to infrastructure construction is still buoyant and the valuations on these stocks are attractive.

But investing in this sector isn't without risk. Even with a strong pipeline of projects, construction companies can still get into trouble. Lendlease Group (ASX: LLC) is a case in point as problems within its engineering division have led to profit downgrades.

There are takeover rumours circling the stock but that won't be enough to convince me to buy shares in Lendlease until it can properly address the problematic part of its business.

Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited and James Hardie Industries plc. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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