North Korean crisis spooks markets but small caps provide opportunities

North Korea Kim Jong-un markets small caps

Markets hate uncertainty and there is nothing quite as unsettling as an unstable North Korean leader with missiles, a point to prove and a potential nuclear capability.

So it was a fairly predictable finish to the past week with the ASX 200 following other share markets lower as the sabre rattling between Kim Jong-un and the rest of the world continued.

Some big stocks trading ex-dividend didn’t help and by the Friday close the ASX 200 had fallen below the 5700 mark to close at 5670 but within that feeble weekly result there were some interesting trends which investors would be wise to take note of.

ASX 200 chart Kim Jong Un North Korea

Financials lead the way down

One was the continued downside outperformance of the financials, led by the crisis strewn Commonwealth Bank but also indicating a broader trend.

The only positive signs came from the classic defensive sectors such as telecommunications and real estate but the cloud also had a classic silver lining – and gold as well – as the precious metals and also some base metals such as nickel had a good week.

Not even the West Australian government’s lame-brained plan to soak the state’s gold producers with extra royalties to prop up the budget was enough to completely derail the trend for gold producers and the yellow metal itself.

Materials a long term trend

Unlike a classic swing to defensives though, the materials index is the only sector to show up gains on the weekly, monthly and yearly chart, although the trend is now losing a little bit of gas.

North Korean tension was even positive for oil prices as threats of a North Korean boycott led to some positive price action in what has appeared to be a glutted commodity in recent months.

Small Caps provide opportunities

These sort of bland, jittery, uninspired, sideways markets are ideal for the adventurous small cap investor and this week was no exception.

Just looking at Friday as an example, there were a string of small caps showing daily returns above 20 per cent and some as much as ten times that as a host of mainly mining names such as Bass Oil (ASX: BAS), East Energy Resources (ASX: EER), Ventnor Resources (ASX: VRX), Merlin Diamonds (ASX: MED), 3D Oil (ASX: TDO) and New Age Exploration (ASX: NAE) showed the market a clean set of heels.

Obviously it can be a volatile space but if trading big share price movements are your thing, there is no better place to be.

The hefty movement in small caps in both directions is not merely a result of boom and bust trading – it is also a space where company changing announcements can come thick and fast and it doesn’t take much to move the needle.

Gold miner Empire Resources ERL ASX underground production

One example this week was Empire Resources (ASX: ERL), which put out a flurry of ASX releases around its Penny’s Find gold play near Kalgoorlie.

They were mainly positive too, with the announcement of some diamond drill rigs getting ready to probe the “open at depth’’ deposit below the open pit, preparing for a possible underground mine.

Empire is also busily trucking ore to two mills and this week entered discussions with a third in an attempt to prune road haulage costs.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining and technology.