Business

Why U.S. small caps may lag despite U.S.-China trade truce

NEW YORK (Reuters) – A truce in the trade war between the United States and China that pushed large-cap stocks to new record highs Monday does not appear to be enough to buoy the shares of small U.S. companies that are struggling under the weight of higher tariff costs.

FILE PHOTO: U.S. and Chinese flags are seen in front of a U.S. dollar banknote featuring American founding father Benjamin Franklin and a China’s yuan banknote featuring late Chinese chairman Mao Zedong in this illustration picture taken May 20, 2019. REUTERS/Jason Lee/Illustration/File Photo

Lower margins and less pricing power are preventing small companies from either passing on or weathering the effects of higher trade tariffs to the same degree as large caps, effectively putting a ceiling on their growth prospects, fund managers and analysts say.

That is souring investors on their shares and leaving small-caps underperforming in a steep reversal from last year, when many investors jumped into small companies in the expectation that they would be insulated from the trade wars because of their focus on the domestic market.

For the year to date, the benchmark Russell 2000 index of small companies is up nearly 17%, yet remains more than 8% below the record highs it reached in August 2018. The large-cap S&P 500, by comparison, hit record highs Monday as part of its nearly 18.5% rally this year.   

“I would not be overweight in small caps right now because the risks are too high relative to large caps,” said Barry James, a portfolio manager at James Advantage Funds whose James Micro Cap fund is one of the top-performing small-cap funds for the year to date. “That’s eventually going to change and they could have a spectacular run, but this year at least the index overall is not attractive from a risk standpoint.”

The Russell 2000 index is dominated by financial and healthcare, two sectors that face the risk of compressed margins from lower interest rates and increased governmental regulation if Republicans lose either the presidency or the Senate in the 2020 elections, James said.

As a result, James is focusing on companies like recreational products maker Johnson Outdoors Inc and electric wire maker Encore Wire Corp that have above-average growth prospects, he said.

The United States and China agreed on Saturday to resume trade negotiations after U.S. President Donald Trump offered concessions to his Chinese counterpart Xi Jinping when the two met at the sidelines of the Group of 20 summit in Japan.

Those included no new tariffs and an easing of restrictions on tech company Huawei Technologies Co Ltd [HWT.UL]. China agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table.

Dan Mahr, a portfolio manager of the Federated MDT All Cap Core fund, said that his fund remains underweight small caps in favor of larger companies like MasterCard Inc and Charter Communications Inc that are benefiting more from market momentum.

“Investor sentiment is much higher as you go up the cap-scale,” he said.

WEAKENING GLOBAL ECONOMY

A weak global economy is also weighing disproportionately on small-cap stocks, which are saddled with rising international revenues and feel a greater hit from trade tariffs than large caps, said Venu Krishna, deputy head of U.S. equity research at Barclays.

“The core issue is that global growth is slowing and while the trade war concerns ebb and flow there’s a general sense that they are here for longer,” he said. “We don’t see a catalyst that will push small-caps higher.”

Barclay’s now estimates that small-caps will post EBITDA (earnings before interest, tax, depreciation and amortization) growth of 2% this year, down from its estimate of 5.5% growth earlier this year, Krishna said.

Those economic concerns are pushing investors to pile into companies that seem to be flawless and punish those that might miss analyst estimates or have additional leverage on their balance sheets, said Randy Gwirtzman, a portfolio manager of the Baron Discovery fund.

“If it’s not perfect, it’s not working right now,” he said.

As a result, Gwirtzman has been moving into biotech companies Revance Therapeutics Inc and Esperion Therapeutics Inc that have been hurt by investor skittishness over the healthcare sector. At the same time, he has been adding to his position in cyber security company ForeScout Technologies Inc, whose shares tumbled in May after its guidance fell short of Wall Street expectations.

“There are many quality companies that for whatever reason people are just scared of,” Gwirtzman said. “People are running to things that have no problems in them and paying a lot, and we’d rather get things with manageable problems at much lower multiples.”

Reporting by David Randall; Editing by Jennifer Ablan and Lisa Shumaker


Source link

health news headlines provided courtesy of Medical News Today.

Advertisement

Advertisement Small

Follow Me

Collaboratively harness market-driven processes whereas resource-leveling internal or "organic" sources. Competently formulate.

View More Job Search Results

Calendar

July 2019
M T W T F S S
« Jun    
1234567
891011121314
15161718192021
22232425262728
293031  

Pages

Recent Comments

    RSS Meks Blog

    • How to easily create WordPress dropdown menu (without coding) July 17, 2019
      Interested to create WordPress dropdown menu all by yourself and don’t know how? Just follow our guide and learn in no time! The post How to easily create WordPress dropdown menu (without coding) appeared first on Meks.
      Ivana Cirkovic
    • 12 must join Facebook groups for photographers July 11, 2019
      Whether it’s for constructive feedback or new learnings, these Facebook groups for photographers are a great networking place to be in! The post 12 must join Facebook groups for photographers appeared first on Meks.
      Ivana Cirkovic
    • Easy guide on how to make your WordPress site private July 4, 2019
      Wondering how to make your WordPress site private knowing there is no built-in option to it? Read our guide and learn all about it! The post Easy guide on how to make your WordPress site private appeared first on Meks.
      Ivana Cirkovic
    • 10+ email list building ideas and tools (to easily grow your customer base) June 27, 2019
      What are some of the most efficient email list building ideas and tools to grow your audience in 2019 and beyond? Here’s our recommendation! The post 10+ email list building ideas and tools (to easily grow your customer base) appeared first on Meks.
      Ivana Cirkovic
    • The future of WordPress and Gutenberg Editor – Matt’s talk at WordCamp Europe 2019 June 22, 2019
      What seems to be the future of WordPress and Gutenberg Editor? These are the topics Matt covered in his summer state of WordPress at WCEU in Berlin and all the great things coming ahead. The post The future of WordPress and Gutenberg Editor – Matt’s talk at WordCamp Europe 2019 appeared first on Meks.
      Ivana Cirkovic
    • How to easily add Google Fonts to your WordPress website June 19, 2019
      Do you want to add Google fonts to your WordPress website? Here’s how you can freshen up your web place and make it faster, trendy and more appealing. The post How to easily add Google Fonts to your WordPress website appeared first on Meks.
      Ivana Cirkovic
    • Using Google Trends for market research to leverage your content creation ideas June 12, 2019
      Did you know you can use Google Trends for market research and target your customer needs, tailor content strategy, in a much better way? The post Using Google Trends for market research to leverage your content creation ideas appeared first on Meks.
      Ivana Cirkovic
    • How WordPress can help you to build and increase brand awareness June 6, 2019
      How can you build and improve brand awareness with WordPress and what steps are needed in that strategy? The post How WordPress can help you to build and increase brand awareness appeared first on Meks.
      Ivana Cirkovic
    • Starting a photography blog: The secrets successful photo bloggers won’t tell you May 30, 2019
      Is starting a photography blog the next step for your personal branding and getting out there with your work? Sure is! And here’s how you can do it! The post Starting a photography blog: The secrets successful photo bloggers won’t tell you appeared first on Meks.
      Ivana Cirkovic
    • 5+ best forum plugins for WordPress to build a loyal community in 2019 May 22, 2019
      Looking for the best forum plugin for WordPress to build a community and keep them engaged? Let us save you the time and choose among these 6 we recommend. The post 5+ best forum plugins for WordPress to build a loyal community in 2019 appeared first on Meks.
      Ivana Cirkovic

    Text

    Distinctively utilize long-term high-impact total linkage whereas high-payoff experiences. Appropriately communicate 24/365.

    Archives