Why Small- And Mid-Cap Companies Could Shine For Investors During A Trade War
Ivan Illan is Chief Investment Officer at AWAIM and bestselling author of Success as a Financial Advisor For Dummies.
Trade wars are messy and unpredictable, and often leave investors scrambling to reposition their portfolios. As tariffs rise, supply chains fracture and global markets wobble, one question looms large: Where should investors seek refuge?
While large-cap multinationals often dominate headlines, small- and mid-cap companies—particularly those with domestic-focused revenues—may offer a compelling investment opportunity in such turbulent times.
The Advantages For Investors
1. Domestic focus
The logic is straightforward. Small- and mid-cap companies tend to generate a larger share of their revenue from domestic markets compared to their large-cap counterparts. This domestic focus can be a significant advantage during a trade war, as these companies are less exposed to the crossfire of tariffs, retaliatory measures and disruptions in global trade.
For example, a U.S.-based mid-cap manufacturer that sources materials and sells products primarily within the country is far less vulnerable to escalating U.S.-China trade tensions than a multinational corporation with sprawling international operations.
2. Agility
Another key advantage is agility. Smaller companies are often more nimble than their larger peers, allowing them to adapt more quickly to changing economic conditions.
In a trade war environment, this could mean pivoting to local suppliers, adjusting pricing strategies or capitalizing on increased demand for domestically produced goods. Large corporations, by contrast, may struggle to reorient their global supply chains or navigate complex international trade policies.
3. Relative anonymity
Small- and mid-cap companies often operate under the radar of geopolitical scrutiny. While multinational corporations can become pawns in broader trade negotiations—think of the regulatory and public relations challenges faced by companies like Huawei or Boeing—smaller firms are less likely to be targeted by foreign governments. This relative anonymity can be a significant tailwind in a trade war scenario.
Risks To Consider
That said, investing in small- and mid-cap companies during a trade war is not without risks.
For one, trade wars often create broader economic uncertainty, which can weigh on consumer and business spending. Even domestically focused companies are not immune to a slowdown in economic activity. Additionally, smaller companies may still face challenges if they rely on imported components or materials that become more expensive due to tariffs.
Another consideration is market volatility. Small- and mid-cap stocks tend to be more volatile than large-cap stocks, and this volatility can be exacerbated during periods of economic uncertainty. Investors with a lower risk tolerance may find this aspect of small- and mid-cap investing particularly challenging.
Finally, access to capital can become a critical issue. In times of economic stress, smaller companies may find it more difficult to secure financing, which could constrain their growth or even threaten their survival. This is especially true for companies with weaker balance sheets or those in capital-intensive industries.
The Bottom Line For Investors
So, what’s the bottom line for investors? While small- and mid-cap companies with domestic revenue streams may offer a relatively safe haven during a trade war, they are not a sure thing.
As always, thorough due diligence is essential. Look for companies with strong fundamentals, resilient business models and manageable levels of debt. Diversification also remains a key strategy—avoid putting all your eggs in one basket, no matter how promising it may seem.
In the end, trade wars are a reminder that no investment is entirely risk-free. But for those willing to navigate the complexities, small- and mid-cap companies could provide a silver lining in an otherwise cloudy economic landscape.
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