Bet On 5 Top-Ranked Small Caps As Trade Tensions Escalate

In the latest edition of the drama on trade and tariffs, President Trump upped the ante against traditional U.S. allies on Monday. In a series of tweets, he attacked Canada and European trading partners, accusing them of heavy tariffs on U.S. products. Trump’s recent statements followed his refusal to endorse a G-7 joint statement backing all-round tariff cuts.

With trade-related tensions refusing to die down, small-cap stocks are looking like an increasingly attractive proposition. Their domestic focus insulates them from a variety of external risk factors. Additionally, these are likely to benefit the most from the Trump administration’s tax cuts. Adding them to your portfolio looks like a smart option at this point.

Refusal to Back G-7 Statement

Speaking at the G-7 summit in Canada on Jun 9, Trump said that trade between member countries should be free from tariff and non-tariff barriers. Initially, statements of this nature struck the right chord with other G-7 members. But Trump refused to specify how the United States would slash its tariff barriers.

Instead, he raised the issue of stiff duties imposed by Canada on U.S. dairy products. Further, he again demanded that Russia be reinstated as a member of the G-8. This is a contentious demand given that Russia was ejected from this group after it annexed Crimea in 2014.

Despite such points of discord, it initially appeared that the United States would back a joint statement calling for all-round tariff cuts. But Trump ultimately refused to back such a declaration. Instead he said that his administration would likely impose tariffs on automobile imports.

Trump’s Tweets Heighten Differences

Despite the bonhomie on show between Trump and Canada’s president Justin Trudea, serious differences cropped up shortly after the summit ended. Speaking to the press on Jun 9, Trudeau said that Canada will proceed to enforce “retaliatory measures” on Jul 1, following the U.S. decision to impose tariffs on steel and aluminum.

Trudeau also emphasized that though Canada was polite, it would “not be pushed around.” The Trump administration seemed to take umbrage to Trudeau’s comments with Trump’s chief economic adviser calling it a “betrayal” on Jun 10.

This was followed by a series of tweets by Trump in which he attacked Canada and other U.S. allies. Taking offence to his statement that tariffs imposed by the United States were “kind of insulting”, the U.S. President said Trudeau was “dishonest and weak.”

Through his tweets, Trump placed a cloud on trading ties between the United States and its traditional allies. According to him: “Fair Trade is now to be called Fool Trade if it is not Reciprocal.” He also asserted that the United States bears the bulk of NATO costs in order to protect countries “that rip us off on Trade.”

Our Choices

The events at the G-7 summit, and immediately after, show that trade relations between the United States and its allies are likely to worsen. Trump shows no signs of relenting on the tariff front. Meanwhile, traditional allies like Canada are toughening their stance following the imposition of tariffs on steel and aluminum.

For investors, small-cap stocks look like the best option at this point. Their domestic focus protects them from a range of external risks. However, picking winning stocks may be difficult.

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Written By: Zacks Investment Research