Recent escalation — just when a resolution seemed near — sent stocks down sharply.
No-one can confidently predict when or how this conflict will be resolved, but we believe investors can navigate their way through the uncertainty by diversifying their portfolios into global small-cap companies.
As risks related to trade concerns persist, the market will differentiate between stocks based on fundamentals.
An active small-cap manager can identify companies that may be positioned to succeed despite the uncertain environment.
Small-cap companies tend to be more domestically focused than larger companies and therefore less exposed to shifting views on global trade and political trends.
The effects of the trade wars have not been felt equally across all sectors of the market in China.Thus, smaller companies concentrated on their local or regional markets may be better insulated from the negative effects of retaliatory tariffs.
Additionally, the global small-cap universe is several times larger than its large-cap counterpart.
This affords investors many more opportunities to find companies well-positioned in their home markets regardless of short-term economic conditions.
Taking a global approach can also help. While some countries or regions are pressured, there are other areas that are thriving.
The size of the global small-cap market allows investors greater flexibility in selecting companies with less exposure to negative trends.
It is true that economic growth in China has been negatively affected by the uncertainty around global trade.
However, the effects of the trade wars have not been felt equally across all sectors of the market in China.
The Chinese economy continues to evolve from a manufacturing and export-driven one, into a more consumer-driven one.
Also, the government remains committed to accommodative fiscal and monetary policies to support the domestic economy and drive consumer demand. These trends have created opportunities in companies positioned to grow revenues and earnings despite the ongoing trade conflicts.
GDS, a leading provider of data infrastructure and services, is an example of a company benefiting from increased information technology spending in China.
While not immune from a potential trade war, we believe the company will continue to deliver healthy revenue growth and improving profitability, in spite of the uncertain environment.
Other domestic-oriented companies may benefit from current tensions. One such example is athletic shoe and sporting goods maker Li Ning.
Already benefiting from the secular trend of the Chinese consumer’s demand for a healthier lifestyle through more sport and exercise, the Li Ning brand may gain from patriotic sentiments at the expense of foreign brands.
Li Ning is seeing double-digit same store sales growth as China’s 200 million-plus millennials support this homegrown brand.
The small-cap universe also includes companies like Avalara, a provider of cloud-based tax management software to medium-sized US businesses that are in the early stages of their growth cycles and domestically focused.
The company is just tapping into an addressable market of approximately $8bn (£157bn) dollars in the US alone, and the market continues to grow.
We believe the company’s long-term fundamentals are resilient to rising trade tensions and the company will continue to deliver healthy growth, even with the potential for higher trade tariffs.
Recent court rulings in the US mandating collection of taxes for e-commerce sales should further support the company’s business prospects.
It is important to remember that these disputes will be resolved eventually. There is too much at stake for all sides to prolong such conflicts indefinitely.
We believe such a resolution, combined with the current low interest rate environment and China’s ongoing stimulus measures, would boost not just the Chinese economy, but growth globally.
Trevor Gurwich is a senior portfolio manager at American Century Investments
