You can sense it before any data confirms it when you stroll through an industrial estate on the outskirts of Ho Chi Minh City on a weekday morning. You can hear the clatter of assembly lines through corrugated metal walls, see cargo trucks waiting at loading bays, and smell the mixture of diesel and machine oil in the humid air. There’s movement. The factories are packed.
The companies performing the job are primarily names that don’t show up in the big indices or are highlighted in the quarterly earnings calls that Wall Street monitors, and the orders are coming from sources that weren’t there five years ago. They’re tiny. Liquid? Barely at times. However, they are in the midst of what may be the biggest reorganization of the global manufacturing landscape in decades, and some investors are beginning to take notice.a
A fairly straightforward concept drives the global micro-cap hunt, which involves searching for foreign penny firms to keep an eye on among emerging market suppliers as trade channels change. Multinational firms are shifting manufacturing and sourcing away from China and toward nations that are thought to be more politically stable or geographically convenient, rerouting almost $1 trillion in global trade. Large portions of textile and electronics contract manufacturing are being absorbed by Indonesia, Vietnam, and India.
As European businesses reduce their supply chains, Eastern European nations—from Poland to Romania—are taking on industrial automation and specialist machinery projects. North American consumer goods are increasingly choosing to be nearshored to Mexico and other Latin American nations. There is ample documentation of the macro tale. What that means for the small businesses that are actually working at the bottom of those supply chains is something that isn’t often monitored.
These are not well-known names. The NYSE is not where they trade. Many of them are listed on regional markets, such as the Mexican Bolsa, the Warsaw Stock Exchange, and the Bombay Stock Exchange, with market caps considerably below $250 million and daily trading volumes that can be thin enough to significantly alter the price on a single order of a reasonable amount. Since illiquidity affects both parties, it must be addressed first in any genuine investigation.
It’s the reason these stocks can produce enormous returns when the story succeeds—a small business that wins a new contract from a multinational that relocates its supply chain can see its revenue double in a single year—and it’s also the reason that exiting the market when the story fails is costly, time-consuming, and painful. On micro-cap OTC listings, bid-ask spreads have the potential to reduce a short-term gain before it is completely realized.
The problem of reporting standards is more difficult to measure and more likely to be underestimated. Due diligence is more difficult for investors since smaller overseas exchanges may not necessarily demand the same level of financial transparency as US-listed businesses. By filtering Indian micro-caps based on profit margins and debt-to-equity ratios, tools such as Screener India provide at least some numerical grounding.
Cross-border trade flow data from Bloomberg Markets can help determine whether the revenue growth of a regional logistics company is driven by real trade volume or something more transient. Observing analysts attempt to establish confidence in these names serves as a reminder that when these trades are successful, you are actually being compensated for information asymmetry rather than just valuation.
In the same way that China’s manufacturing growth made fortunes for early investors in Chinese small-caps in the 2000s, it is still uncertain if the $1 trillion trade shift would result in a clear generation of winners among micro-caps. The fact that a corporation relocates its plant across a border does not eliminate the geopolitical risk that first prompted the change; the markets and circumstances are different. There is a feeling that the window is open and the potential is real, but getting there will need more tolerance for uncomfortable uncertainty, patience, and local expertise than most retail portfolios are actually designed to carry.
