Zak and Christopher discuss this week’s moves in the financial markets, including the TACO Trade, Bitcoin Treasury, a revival of small caps, and how to play tariffs.
In the latest episode of ZaksTradersCafe, Zak Mir sits down with Christopher Nicholson, Managing Director and Head of Research at ACF Equity Research, to dissect some of the most intriguing themes currently shaping the financial markets.
From the infamous “Taco Trade” to the burgeoning Bitcoin treasury phenomenon and the potential revival of small caps amidst global tariff tensions, this conversation offers a rich perspective on how investors might navigate today’s complex landscape.
One of the standout topics in this discussion is the so-called “Taco Trade,” a phrase coined in the Financial Times to describe a market strategy revolving around US President Donald Trump’s tariff policies and the subsequent market dips they provoke. “Taco Trade” reflects a pattern where markets dip sharply on fears of tariffs, only for savvy investors to buy the dip, betting that Trump will ultimately “chicken out” or back down from implementing drastic measures. This strategy hinges on the notion that while tariff threats generate volatility and uncertainty, they rarely result in sustained or severe market damage.
The Economic Nonsense and Political Soundbites Behind Tariffs
While the markets respond to tariff news, is clear that economically, the tariff moves and trade wars make little sense. This political theatre, creates complex market dynamics. On one hand, large multinational companies with global supply chains face genuine risks and uncertainties from tariffs. On the other hand, smaller companies focused on home markets or regional trade zones might actually benefit from a simpler trading environment where tariffs discourage global competition.
Small Caps Revival: A Bright Spot in a Complex Market
One of the most optimistic segments of the conversation centers on the revival of small cap stocks, particularly in the UK and Europe.
Several factors contribute to this revival:
- Survival of the Fittest: Many weaker small cap companies have already exited the market, leaving a leaner, more resilient group that attracts investor attention.
- Proper Funding: “proper funding” for small caps, distinguishing it from token fundraising. Well-funded companies can pursue growth and innovation, which is reflected in their stock performance.
- Special Situations and Trends: Companies that have surprised the market with positive developments, such as new fundraises or strategic pivots, have seen significant share price rises.
- AI and Bitcoin Treasury Themes: Small caps that have embraced AI technology or added Bitcoin to their treasury have experienced dramatic gains, riding current market zeitgeists.
Importantly, the small cap sector as a proxy for entrepreneurial activity and business dynamism, especially when traditional business environments are burdened by bureaucracy, taxes, and regulation. The stock market becomes a relatively freer zone for investment and growth, which may explain the renewed investor interest.
Comparing Small Caps Across Europe
Looking beyond the UK, small cap indices in countries like Germany and Poland have also performed well recently. For example, Germany’s small cap index, the SDAX, has gained between 7-10% over the past couple of months, outpacing the UK’s AIM index slightly. This suggests a broader European small cap revival, driven by quality companies in diverse markets.
However, cautions that the recent rises in small caps have been driven more by special situations and thematic plays—such as AI or Bitcoin treasury adoption—rather than by broad undervaluation. This leaves room for further gains if undervalued money eventually flows in.
Bitcoin Treasury: Volatility and Opportunities
A particularly fascinating part of the discussion focuses on companies adding Bitcoin to their treasury reserves. This move has created extreme volatility in share prices, with some small caps experiencing 10x increases simply by associating with Bitcoin or AI themes.
Accounting-wise, Bitcoin held on a company’s balance sheet is treated as an intangible asset, recorded at cost and subject to impairment if its value falls. This means that if Bitcoin prices crash, companies cannot simply write the asset back up unless they sell it at a profit, which adds a conservative dimension to accounting practices.
From an investor standpoint, companies holding Bitcoin add a layer of volatility to their stock prices. This can be a double-edged sword: share prices may soar if Bitcoin rallies, but crash if Bitcoin collapses.
The Impact of Tariffs on Small Caps and Investment Strategies
While large multinational companies might suffer from tariff barriers due to complex global supply chains, smaller companies operating primarily in their home markets or neighbouring regions may actually benefit.
Investors often find smaller and midcap companies easier to understand because their business models are simpler and less exposed to the complexities of international trade tensions. This makes small caps more attractive in an environment where tariffs are creating uncertainty and complexity for global giants.
Conclusion: Navigating Today’s Market Landscape
The small cap sector appears poised for a revival, supported by proper funding, special situations, and thematic trends like AI and Bitcoin treasury adoption. For investors willing to embrace volatility and complexity, small caps offer unique opportunities that might be less affected by global trade tensions.
Finally, seek out independent, expert analysis rather than relying solely on mainstream media narratives.
