On 2 April, US president Donald Trump announced extensive tariffs on almost every country worldwide to retaliate against what he claimed were decades of unfair trade practices. These sweeping tariffs have significantly impacted countries and regions including Europe, China and south-east Asia, while others, like Canada and Mexico, have experienced comparatively better outcomes.
Since then, the subsequent trade war has eased somewhat, most notably with a 90-day negotiation window and de-escalation of tariffs between the US and China; policy uncertainty continues to make waves across global markets.
Higher tariffs tend to slow economic activity, which can disproportionately impact small-cap stocks due to their sensitivity to economic conditions and limited pricing power relative to large-cap peers. Small-cap stocks have experienced a notable sell-off since last November, leaving them currently among the cheapest asset classes.
Tariffs affect sectors and companies in different ways and understanding these nuances is key. As active small-cap value managers, we believe this creates an opportunity for us to identify high-quality securities less affected by global trade policies.
Industrials
Industrial businesses are facing a mixed outlook. We believe money transfer companies like Brinks or Loomis are unlikely to face any negative impacts, possibly benefitting from bolstered demand for moving money or valuables like gold. Conversely, other industrial stocks might face headwinds. School bus manufacturer Bluebird, for example, sources components from Canada and Mexico and buys most of its steel from the US, but tariffs on imports will increase domestic prices.
Automobiles
Autos have largely avoided severe fallout, with the Trump administration opting out imposing reciprocal tariffs on imported vehicles, with Canada and Mexico exempt from reciprocal tariffs offering hope that negotiations could still occur among North American trading partners. Thanks to the US-Mexico-Canada Agreement (USMCA), auto suppliers remain exempt from tariffs, although it’s unclear whether this exemption will be permanent.
Original equipment manufacturers, or OEMs, received some relief, as US-made cars will get a reimbursement of 3.75% of the manufacturer’s suggested retail price (MSRP) for tariffs paid on non-US content. However, consumer prices will likely increase, leading to lower demand and production.
Residential real estate
Tariffs may lead to cost increases for homebuilders, but these costs could be absorbed at various stages of the construction process without being passed on to homebuyers. A significant challenge would arise if higher prices for everyday items and general economic uncertainty cause consumers to postpone home purchases. The Federal Reserve is cautious about lowering interest rates due to inflation concerns, meaning homebuilders must continue to handle higher mortgage rates.
Consumer staples
Traditionally defensive, consumer staples remain a perceived safe haven, although not entirely immune, as tariffs can still have unique effects on these companies; although this less cyclical sector should perform better during the current economic turbulence.
For example, Spectrum Brands wants to sell its home appliances business, with tariffs on the imported parts and materials complicating valuations the company’s efforts to sell the business.
Specialty retail
Many clothing brands have moved production to south-east Asia, shifting from China to countries like India, Vietnam and Cambodia, which are experiencing higher tariffs.
Luxury fashion company Capri Holdings is facing challenges from tariffs because of its manufacturing presence in south-east Asia at the same time, working on revitalising its brand amid a slowdown in consumer spending; having recently sold its iconic Versace brand to Prada, it’s provided with essential cash to navigates a challenging market.
Energy
Tariffs won’t directly impact energy, but energy demand may decline if trade barriers impede the US economy. Following the tariff announcements, crude oil prices fell, indicating expectations of an economic slowdown in energy consumption.
Our optimism for small-cap energy stocks is twofold. Stocks in the sector are well priced, and the companies have better balance sheets than they did years ago. Many small-cap energy companies have hedged future production at higher levels, which may help protect margins even if crude prices continue to fall.
Healthcare
Some of the higher-quality businesses in the healthcare sector are medical device manufacturers, which commonly obtain materials from abroad. Are these imported materials subject to tariffs?
Enovis, orthopaedic components producer, imports materials from a textile factory in Mexico - 90% of which are exempt from tariffs under the USMCA. However, tariffs on steel and aluminium will affect the company’s implants business. The company expects the net cost of tariffs to be slightly less than its previous estimate of $3m to $4m monthly.
Healthcare companies may be exempt from tariffs in other ways. For example, Embecta, a manufacturer of insulin delivery devices, produces a pen needle in Europe that’s sold in the US The company’s products qualify for tariff exemptions under the Nairobi Protocol, an international agreement that exempts a limited range of medical products intended for use by individuals who have disabilities.
Real estate investment trusts
We believe real estate investment trusts (REITs) are among the best-positioned sectors to weather tariffs, although trade policies can have distinct effects on specific subsectors; Lodging and retail REITs may face headwinds if higher prices reduce consumer spending on travel.
Industrial REITs could experience lower demand at ports but also benefit from reshoring. In our opinion, health care and other triple-net REITs are likely the most insulated from tariffs, as their longer-term leases typically provide a layer of security to these subsectors.
Jeff John, Ryan Cope, Tyler Dunaway and George Clark run the American Century Small Cap Value fund. The views expressed above should not be taken as investment advice.