Over the past several weeks, tensions with North Korea, China and Iran dragged the broader equity market down on several occasions. Now, mounting fears about political instability in Italy and Spain are ripping through markets.
Despite escalating geopolitical issues, small-capitalization stocks stay fairly immune. This is because such stocks have high domestic exposure in terms of revenue generation, which shields them from the aftermath of international disputes. Thus, investing in sound small caps seems sensible at the moment.
Deepening Italian Crisis
Political crisis in Italy has created ripples across the global equity markets. Investors fear that such a crisis in one of Europe’s largest economies will wreak havoc worldwide. It’s a constitutional crisis after president Sergio Mattarella vetoed the appointment of economy minister Paolo Savona who is known to have criticized the European Union and European integration.
Savona was recommended by a coalition of the populist 5 Star Movement and the League. Party leaders from 5 Star asked for Mattarella’s impeachment, per the Wall Street Journal. Collapse of a populist coalition raised concerns that the country will be thrown into a mess early elections, while short-term borrowing costs soared for the government in Rome.
Spain’s Political Crisis Roils Markets
Markets are also rattled by the political turmoil in Spain. In an effort to oust Prime Minister Mariano Rajoy, Spain’s major opposition party has called for a parliamentary vote. This is because a court has ruled that the party in power benefitted from an illegal kickback when the country was undergoing a property boom.
Center-left Socialist Party filed the confidence vote and it was supported by the far-left Podemos. This has added to increasing political pressure that is weakening the premier’s party. A court has already handed some former members of the premier’s center-right Popular Party jail sentences and asked them to pay millions of euros in fines due to their roles in the corruption scheme.
Tensions With North Korea
Trump’s decision to call off a June meeting with Kim Jong Un, by the way, appears to have done little to the North Korea crisis. Trump citied “open hostility” from the North Korean regime as the primary reason for scrapping plans for a summit with Jong.
Kim Kye Gwan, senior North Korea foreign ministry officials’ harsh words with national security adviser John Bolton embittered the relationship between the adversaries. Nonetheless, Gwan did express his willingness to resolve disputes with the United States. Growing North Korea nuclear threats are cited to be the reason behind this hostility.
Withdrawing From Nuclear Treaty, Trade Tensions Remain
Trump’s withdrawal from the Iran nuclear deal hasn’t gone down well with leaders in Europe as well. They have categorically expressed their distrust toward the United States. But, it’s not the European anger that should bother America but the Middle East tensions. Saudi Arabia has inclined toward Israel in order to get sanctions against Iran. This has raised tensions between Iran and Israel, and peace in the Middle East seems like a far-fetched idea.
But, why just the Middle East? Undercurrent trade tensions remain between the United States and China. And this has far-reaching implications on economies around the world. Needless to say that it also affects corporate profits. Tensions surfaced after the countries began to make lists of products subject to tariffs, including aerospace items.
Small Caps to the Rescue: 5 Solid Picks
As geopolitical risks loom large, investing in small-cap stocks seems judicious. Due to their limited international exposure, small caps offer higher protection than their large- and mid-cap counterparts against global downturns. The Russell 2000 index that mostly comprise small-cap stocks is up 5.5% month to date and is just 0.6% shy of a record close notched on May 21.
We have, thus, selected five small caps that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Turning Point Brands, Inc. TPB provides tobacco products, primarily in the United States. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 18.2% in the last 60 days. The stock’s expected earnings growth rate for the current year is 50% versus the Tobacco industry’s estimated rally of 11.9%.
Old Second Bancorp, Inc. OSBC operates as a bank holding company for Old Second National Bank that provides a range of banking services. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 5.7% in the last 60 days. The stock’s expected earnings growth rate for the current year is 37% versus the Banks – Midwest industry’s projected gain of 28.7%.
Oxford Square Capital Corp. OXSQ operates as a closed-end, non-diversified management investment company. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 3.1% in the last 60 days. The stock’s expected earnings growth rate for the current year is 11.7% versus the Financial – SBIC & Commercial Industry industry’s estimated rally of 0.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
RCI Hospitality Holdings, Inc. RICK engages in the hospitality and related businesses in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 8.5% in the last 60 days. The stock’s expected earnings growth rate for the current year is 52.5% versus the Leisure and Recreation Services industry’s projected growth of 18%.
Echo Global Logistics, Inc. ECHO provides technology-enabled transportation and supply chain management solutions in the United States. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings moved up 13.5% in the last 60 days. The stock’s expected growth rate for the current year is 66.3% versus the Transportation – Services industry’s estimated rally of 19.8%.
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