Why now is the time to be optimistic about US smaller companies

I’m Staci West from FundCalibre, and today I’m joined by Cormac Weldon, manager of the Artemis US Smaller Companies fund. Cormac, good morning, how are you?

Good morning, Staci. Very well, thanks.

Excellent. So, let’s start with the US economy. You said before Christmas that we haven’t had a slowdown yet. So, has it now arrived? Are we still waiting? What are some of your thoughts at the moment?

Well, it hasn’t arrived yet, and actually, just recently, we’ve seen some very strong employment data. Indeed, I think the unemployment rate in the US is now amongst the lowest in history, certainly over 50 years or more. So, … and about half a million jobs were added in the most recent month … so, no, the slowdown hasn’t arrived for the economy in general. There are small parts of the economy that are being impacted. So, for instance, mortgage rates are quite high in the US at the moment. So, the purchase and sale of houses has slowed down quite a bit, but that’s only a relatively small part of the overall economy. When you look at consumer demand and indeed corporate investment, at the moment they remain strong. That being said, we might expect something of a slowdown over the next number of months as inflation slows down, that will slow down the economy a bit.

And how does that leave smaller companies? Some think that they will do better than the US large caps in the next few years. So, do you agree with that sentiment?

Certainly … so, we think the economy will slow down somewhat this year, before recovering when interest rates start to be cut and reduced when – and we’re assuming it’s when, not if –  when inflation goes down to lower levels. That’s usually a very good time to be invested in smaller companies because you get a domestic economic recovery in the US – it’s not about China or Europe or anything like that – it’s what’s happening in the US economy. And if we’re getting an economic recovery in the US, that’s usually very good for smaller companies because they’re the ones that are most focused on what’s happening in the US economy. So yes, we’re quite optimistic about the prospects for US smaller companies over the next number of years.

And then what are some of those big themes putting a tailwind behind the smaller companies for the next few years?

Yeah, what’s great about it is there’s a number of themes I thought we could talk about: the first one and maybe people have seen this, about the significant investment that the [US] government is making in renewable energy as an example. So, Joe Biden was talking recently about his inflation reduction act, which really supports investment in renewable energy, which the utility companies are then investing heavily in, as one example. So, very significant investment at that. We can invest in companies that will benefit from that for we think a number of years, perhaps decades. In addition, you know, we often hear people talking about how terrible US roads are and the airports are like third world airports, so there’s also significant infrastructure investment happening in the US. Lots of government money has been put forward to fund that sort of thing.

And then the final one is [during Covid] everyone realised that we were perhaps too reliant on China in particular, for some key items that go into what we use every day. So, for instance, pharmaceuticals; we realised some of the key building blocks of pharmaceuticals were all made in China. And so, pharmaceutical companies are now building up capacity to produce that in the US. And semiconductors would be the other obvious area where that is also happening. So, there that’s one area. 

The other area I would say, is in some of the stocks that have underperformed a lot recently because interest rates have gone up. So, interest rates have gone up and for instance, housing-related companies have performed very poorly. But, as we look over the next few years, we think interest rates are likely to start falling at some point, and that’ll be a significant driver of housing activity, especially as the US actually hasn’t built enough houses in the last five or 10 years since the financial crisis. So, that would be a recovery area that we’d be very interested in.

Well, I’m glad to hear that infrastructure’s going into airports because I fly to the US often, and you are right, some of them could stand to have a bit of work done.

Little bit of TLC, that’s for sure.

<Laugh>. But so, you mentioned renewables there, and I want to kind of stick with that a little bit with climate change because you mentioned previously that onshoring and decarbonisation could change the long-term picture for inflation. So, can you just expand on this a little bit for the viewers, and do you think that this is a threat for investors?

It’s a super question and the answer is we don’t know the answer yet. So, just to explain why we might have made that comment: Things are being manufactured in China because labour is much cheaper in China, or it was – there are other areas of the world like Vietnam that are now cheaper and US companies are moving from China to Vietnam – so, I think what’s important about the companies that are relocating to the US is they don’t depend on having lots and lots and lots of people, rather, it’s lots of equipment. So, for instance, a semiconductor factory is really a massive investment in these very sophisticated machines that make the semiconductors. Those machines cost the same whether they’re bought in America or bought in China. So, really the cost of producing a semiconductor in the US shouldn’t be that much different to what it is in China.

That’s great. Thank you. Certainly a lot to think about and good to see optimism as well coming through. Thank you for taking time to talk to us today.

Not at all. It’s been pleasure. Thank you very much.

And for more information on the Artemis US Smaller Companies fund, please visit FundCalibre.com.