Why do you believe now is the right time for US SMID stocks?
We believe now is a really good time to be investing in US smaller and mid-cap stocks. Not only is the relative valuation cheap when compared to large-cap counterparts, but we also expect enhanced earnings growth over the next couple of years. The US economy remains strong, with a robust corporate sector and a consumer that is in good shape. All of this is set against the backdrop of a new administration with a pro-growth, pro-business agenda. This suggests to us a very attractive set up for smaller and mid-cap stocks over the coming couple of years.
How might President Trump’s pro-growth agenda impact this sector?
We believe there will be three main beneficiaries of President Trump’s pro-growth, pro-business agenda. The first is within the industrials and materials complex, where ongoing infrastructure spend and onshoring will benefit domestic industrial companies. The second is those group of companies that will benefit from deregulation. Specifically, here we are thinking about energy and financial businesses. And the third is those group of companies that will benefit from ongoing focus on government efficiency, on law and order, and on defence spending.
Do you expect the broadening out of the market to continue in 2025?
We expect the broadening out of the market to continue in 2025 and beyond, based on a change in relative earnings momentum. By that, we mean that some of the mega-cap tech businesses that have posted such good numbers over the last year or two may find it hard to sustain that level of earnings growth. Conversely, we expect smaller companies’ earnings to accelerate based on significant operating leverage, low expectations, and low multiples.
Additionally, we feel investors may be attracted by the lack of concentration in the small and mid-cap part of the market, together with the opportunity to participate in M&A as rates normalise and the economy remains strong. We believe the winners of the next three years may look very different to the winners of the last three years.
Should investors be concerned about recent volatility in the tech sector?
We are very excited by the prospect of AI and the productivity enhancements that suggests across a range of businesses in our portfolio. That said, expectations in certain companies are high and so are valuations. Volatility is therefore to be expected.
Our approach remains to invest in a broad spread of high-quality businesses that we feel will benefit from the productivity gains that AI generates over the coming years.
