Small-cap stocks bear the brunt of trade dispute

Contrary to popular thinking, smaller companies prove most vulnerable to geopolitical wrangling

May 13, 2019 @ 4:01 pm

By Jeff Benjamin

As the United States and China roll out tariff hikes in an escalating trade war, smaller-company stocks are taking the biggest hit.

Contrary to the general belief that smaller companies are more immune to global politics and macroeconomics, on Monday the market deemed the smaller end most vulnerable to the geopolitical dustup.

"Just because smaller-company revenues are more domestically oriented doesn't mean these companies are protected," said Ralph Bassett, deputy head of North American equities at Aberdeen Standard Investments.

"Smaller companies are more volatile and less liquid to begin with, but they also have thinner margins that make it more difficult for them to absorb the cost of tariffs," he said.

The Dow Jones Industrial Average was down 617.38 points Monday, or 2.38%. The S&P 500 lost 69.53 points, or 2.41%, while the S&P Small Cap 600 index was down 29.61 points, or 3.07%.

Chris Wallis, chief executive and chief investment officer at Vaughn Nelson Investment Management, also cited the unique vulnerability of smaller companies in a trade war.

"They have less margin to absorb tariffs than larger companies have, and they have less resources to move their supply chain around," he said.

While Mr. Wallis is not optimistic the U.S. and China will come to a resolution on tariffs, he isn't overly concerned about the impact on the financial markets.

"Small-caps were fairly valued in the third week of December during the sell-off, then the markets ricocheted back starting in January," he said. "The economy is fine, but the markets are just out of whack right now."

Mr. Bassett, who manages the $1.2 billion Aberdeen US Small Cap Equity Fund (GSCIX), is also keeping the market volatility in context.

"It's a sizable one-day drop, but we've had a good run this year," he said. "I think the market is reacting to uncertainty, and we don't maneuver quickly around the fear of the day. No company is immune to risk."

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