‘Sugar high’ from tax cuts may be short lived if trade war escalates
China’s response to possible tariffs on US$200 in goods would likely hit across sectors, especially small caps, say analysts
While the US economy and stock market have been resilient to the nascent trade conflict instigated by the Trump administration thus far, new research suggests that a huge number of businesses will be vulnerable, should things escalate further.
Equities strategists at Barclays wrote in a paper this week that a “sugar high” provided by tax cuts and fiscal spending will only go so far. If the Trump administration goes ahead with proposed 10% tariffs on US$200 billion in Chinese goods, investor and business confidence will take a hit.
Paradoxically, the research also found, small-cap stocks may actually be more vulnerable than large caps, due to lower margins and fewer foreign subsidiaries.
So far, small-cap stocks have outperformed, which may be due to the belief that, with less reliance on international sales, they are less exposed to trade wars. The outperformance has been broad based across sectors.
Despite this, the strategists say, what really matters is actual import/export values as well as margins, and the impact an all-out trade war would have on EBITDA. While small caps have less of a dependence on exports than large caps, they are more dependent on imported production inputs. As such, their profits would take a bigger hit in a trade war.