TRANSCRIPTION 🔗
1
00:00:00,050 --> 00:00:02,218
When people talk about artificial intelligence,
2
00:00:02,218 --> 00:00:04,637
they usually think of the biggest tech companies,
3
00:00:04,637 --> 00:00:06,806
especially those in the Mag 7.
4
00:00:06,806 --> 00:00:09,292
But what if I told you that as an investor,
5
00:00:09,292 --> 00:00:11,027
you might also want to go smaller
6
00:00:11,027 --> 00:00:12,362
and maybe a little more regional?
7
00:00:12,362 --> 00:00:14,597
But we're talking about small cap stocks.
8
00:00:14,597 --> 00:00:15,598
Want to know why?
9
00:00:15,598 --> 00:00:18,601
Stay tuned for this episode of UBS Trending.
10
00:00:29,662 --> 00:00:31,231
Hi everyone, and welcome to UBS Trending.
11
00:00:31,231 --> 00:00:32,148
I'm Anthony Pastore.
12
00:00:32,148 --> 00:00:33,717
Thanks for joining me here in the studio.
13
00:00:33,717 --> 00:00:34,517
Once again,
14
00:00:34,517 --> 00:00:37,253
my guest for today's small cap conversation
15
00:00:37,253 --> 00:00:38,788
and the opportunities therein.
16
00:00:38,788 --> 00:00:39,723
Jeremy Javidi,
17
00:00:39,723 --> 00:00:42,776
who is a Senior Portfolio Manager with Columbia Threadneedle.
18
00:00:42,809 --> 00:00:44,577
Jeremy, nice to have you in the studio. Good to see you.
19
00:00:44,577 --> 00:00:46,413
Thank you. Anthony.
20
00:00:46,413 --> 00:00:47,130
You, you know,
21
00:00:47,130 --> 00:00:49,165
you and I were just talking a little bit beforehand.
22
00:00:49,165 --> 00:00:52,318
There's so much going on within equities in general.
23
00:00:52,318 --> 00:00:54,771
And we talk about the Mag 7 quite a lot.
24
00:00:54,771 --> 00:00:56,539
It's hard to ignore the performance.
25
00:00:56,539 --> 00:00:59,542
There has been unbelievably stellar for a couple of years now.
26
00:01:00,260 --> 00:01:02,479
The Nasdaq itself and the technology side, it's
27
00:01:02,479 --> 00:01:03,530
just unbelievable.
28
00:01:03,530 --> 00:01:04,197
But people
29
00:01:04,197 --> 00:01:05,482
sort of forget to talk about
30
00:01:05,482 --> 00:01:07,367
what's happening on the smaller side.
31
00:01:07,367 --> 00:01:11,187
There's so many small businesses that are I direct
32
00:01:11,187 --> 00:01:12,422
and AI adjacent,
33
00:01:12,422 --> 00:01:16,226
providing critical components to the bigger Mag 7 companies.
34
00:01:16,493 --> 00:01:18,962
I'm just really just high leveling it here.
35
00:01:18,962 --> 00:01:21,681
Talk about with us as we get started, the performance
36
00:01:21,681 --> 00:01:24,984
of small caps of what you've seen as you cover them.
37
00:01:25,201 --> 00:01:27,887
For Columbia Threadneedle, it's just an incredibly
38
00:01:29,239 --> 00:01:30,774
powerful story to watch.
39
00:01:30,774 --> 00:01:32,092
What's been happening there.
40
00:01:32,092 --> 00:01:34,561
I completely agree with you, Anthony.
41
00:01:34,561 --> 00:01:39,199
The key to small cap value and small cap companies in general
42
00:01:39,599 --> 00:01:42,602
is their association with the US economy.
43
00:01:42,952 --> 00:01:45,955
They are the fabric of American exceptionalism.
44
00:01:46,339 --> 00:01:49,342
And when the US economy is doing well,
45
00:01:49,559 --> 00:01:52,312
small cap companies fundamentals improve.
46
00:01:52,312 --> 00:01:57,200
And we know that the market always tracks fundamentals over time.
47
00:01:57,617 --> 00:02:01,171
So when you take a look at this chart right here, what you'll see
48
00:02:01,171 --> 00:02:04,591
is coming out of that 2022
49
00:02:04,591 --> 00:02:07,577
doldrums of that tech implosion.
50
00:02:07,644 --> 00:02:11,281
We started to see the US improve as inflation
51
00:02:11,281 --> 00:02:13,500
started to wind down.
52
00:02:13,500 --> 00:02:17,987
And what we're seeing now in those two really deep red bars
53
00:02:18,354 --> 00:02:22,525
is the AI contribution to the US economy coming through
54
00:02:22,525 --> 00:02:27,530
directly into the fundamentals of small cap value companies?
55
00:02:27,530 --> 00:02:31,885
Because not only are we seeing these exceptional gains,
56
00:02:32,118 --> 00:02:35,522
we're actually seeing multiples compress
57
00:02:35,872 --> 00:02:38,992
because the earnings are what driving these total returns.
58
00:02:38,992 --> 00:02:39,442
Yeah.
59
00:02:39,442 --> 00:02:40,944
I mean just looking at the last
60
00:02:40,944 --> 00:02:44,097
the tail end of that, that's Q1 and Q2 of this year.
61
00:02:44,697 --> 00:02:48,451
I mean, growth is just it's going through the roof.
62
00:02:49,252 --> 00:02:51,204
It's but here's the here's the question then,
63
00:02:51,204 --> 00:02:53,940
because when you look at the overall economic picture,
64
00:02:53,940 --> 00:02:56,543
the fed just raised rates 25 basis points
65
00:02:56,543 --> 00:02:59,729
recently here at UBS, our chief investment office expects
66
00:02:59,996 --> 00:03:02,966
another rate hike likely in December, likely another 25
67
00:03:02,966 --> 00:03:03,900
basis points.
68
00:03:03,900 --> 00:03:07,520
And historically, the word on the street is always well,
69
00:03:07,520 --> 00:03:11,391
as rates go higher, it impacts the smaller companies first.
70
00:03:11,391 --> 00:03:12,742
A lot of them are highly levered.
71
00:03:12,742 --> 00:03:15,511
They borrow against, you know, their own businesses.
72
00:03:15,511 --> 00:03:16,379
What do you say to that?
73
00:03:16,379 --> 00:03:19,015
I hear that misnomer all the time.
74
00:03:19,015 --> 00:03:22,018
It's something that people continue to press me on.
75
00:03:22,318 --> 00:03:23,836
Jeremy, rates are going up.
76
00:03:23,836 --> 00:03:25,255
That's a bad thing.
77
00:03:25,255 --> 00:03:28,258
It really depends on what rates are going up.
78
00:03:28,441 --> 00:03:31,678
Because if you look at the long end of the curve, rates
79
00:03:31,678 --> 00:03:36,332
going up in the long term explains economic expansion.
80
00:03:36,683 -->
Load full transcript
00:03:39,919
So the economy is growing really strong.
81
00:03:40,203 --> 00:03:44,274
The long end rise is because of their competition for capital.
82
00:03:44,691 --> 00:03:48,444
But what that really means is fundamentals are very robust.
83
00:03:48,628 --> 00:03:51,748
What I'm more worried about is when the long end falls,
84
00:03:51,748 --> 00:03:54,234
which signaling economic contraction,
85
00:03:54,234 --> 00:03:57,203
which usually is a poor signal for forward earnings
86
00:03:57,203 --> 00:03:58,771
for small cap companies. Right.
87
00:03:58,771 --> 00:04:02,392
The US right now with the fed moving up short
88
00:04:02,425 --> 00:04:06,529
term rates a little bit, is causing a little bit of a curve's
89
00:04:07,196 --> 00:04:07,947
flattening.
90
00:04:07,947 --> 00:04:09,632
That doesn't worry me whatsoever.
91
00:04:09,632 --> 00:04:11,517
Are there any particular economic trends
92
00:04:11,517 --> 00:04:12,652
that you're seeing right now
93
00:04:12,652 --> 00:04:14,871
or watching that are giving you that confidence
94
00:04:14,871 --> 00:04:16,773
that we're that small cap? Still have room?
95
00:04:16,773 --> 00:04:19,759
Oh, the signal absolutely to watch is us
96
00:04:20,059 --> 00:04:22,979
PMI is associated with manufacturing.
97
00:04:22,979 --> 00:04:27,467
And this right here is a long term chart going back to 2002
98
00:04:27,800 --> 00:04:32,538
looking at the economic expansion of manufacturing.
99
00:04:33,139 --> 00:04:38,027
That KPI is really important to watch because it associates
100
00:04:38,027 --> 00:04:42,448
with the breadth and depth of small cap earnings.
101
00:04:42,749 --> 00:04:45,652
And as you know, markets track fundamentals.
102
00:04:45,652 --> 00:04:48,655
When we see that line over 50
103
00:04:48,721 --> 00:04:51,624
that's signaling manufacturing expansion.
104
00:04:51,624 --> 00:04:53,309
Manufacturing expansion
105
00:04:53,309 --> 00:04:57,864
has a higher proponent of earnings than it does in the U.S.
106
00:04:57,864 --> 00:04:58,681
economy.
107
00:04:58,681 --> 00:05:01,551
U.S. economy manufacturing's 10%.
108
00:05:01,551 --> 00:05:02,852
In small cap earnings.
109
00:05:02,852 --> 00:05:04,620
It's about 20%.
110
00:05:04,620 --> 00:05:08,658
But it also has the velocity and a multiplier across
111
00:05:08,658 --> 00:05:10,493
many different sectors and industries
112
00:05:10,493 --> 00:05:13,496
that have an even greater magnitude.
113
00:05:13,529 --> 00:05:16,382
It's been a long time that U.S.
114
00:05:16,382 --> 00:05:19,619
manufacturing has been below that 50 line.
115
00:05:19,769 --> 00:05:22,772
Really since the third quarter of 22.
116
00:05:23,423 --> 00:05:27,293
But now since the beginning of the year that number is now
117
00:05:27,293 --> 00:05:28,461
signaling expansion
118
00:05:28,461 --> 00:05:29,329
once again,
119
00:05:29,329 --> 00:05:32,281
really providing a great catalyst to earnings going forward.
120
00:05:32,281 --> 00:05:33,683
Yeah. It's amazing.
121
00:05:33,683 --> 00:05:36,753
I hadn't seen this chart until we were sitting down for today.
122
00:05:36,986 --> 00:05:37,820
And I just
123
00:05:37,820 --> 00:05:41,641
I guess I didn't remember or realize that we had been seeing
124
00:05:42,025 --> 00:05:44,911
a lack of expansion in manufacturing since 2023.
125
00:05:44,911 --> 00:05:48,197
So it is amazing to see in 2026 there's pop.
126
00:05:48,414 --> 00:05:50,366
So again, that goes right to what you're saying.
127
00:05:50,366 --> 00:05:53,152
Is your confidence in small caps but looking okay.
128
00:05:53,152 --> 00:05:56,155
Bigger picture here with all the AI, the hyperscalers
129
00:05:56,456 --> 00:06:00,326
there are issues on that side of the story as well.
130
00:06:00,326 --> 00:06:04,013
We have electricity demand, lack of it, or lack of electricity
131
00:06:04,013 --> 00:06:04,947
while demand increases.
132
00:06:04,947 --> 00:06:08,368
I should say we have these data centers that, you know,
133
00:06:08,568 --> 00:06:10,470
it's become sort of a four letter word.
134
00:06:10,470 --> 00:06:13,673
It's become sort of a political, you know, kind of conversation.
135
00:06:13,673 --> 00:06:18,027
Now, do you see any of that playing any kind of hindrance
136
00:06:18,027 --> 00:06:19,379
towards the growth in small cap?
137
00:06:19,379 --> 00:06:21,447
Because there are a lot of small cap names
138
00:06:21,447 --> 00:06:22,982
that are playing in the AI space.
139
00:06:22,982 --> 00:06:26,669
How much of that is tied to these hyperscalers and their growth?
140
00:06:26,869 --> 00:06:31,791
Certainly, there's been no single area that's been more dynamic
141
00:06:32,091 --> 00:06:35,395
than the AI growth over the last couple three years.
142
00:06:35,778 --> 00:06:38,064
We see that across the whole economy.
143
00:06:38,064 --> 00:06:42,001
So certainly the momentum there is not just strong,
144
00:06:42,201 --> 00:06:45,688
but we see that accelerating even into next year.
145
00:06:45,721 --> 00:06:48,024
We're talking to all these small cap companies.
146
00:06:48,024 --> 00:06:49,976
Their backlogs are growing.
147
00:06:49,976 --> 00:06:54,080
They're seeing opportunities not just for linear growth
148
00:06:54,564 --> 00:06:56,032
but exponential growth.
149
00:06:56,032 --> 00:07:01,771
And that is truly revolutionary and exciting for the US economy.
150
00:07:02,338 --> 00:07:04,490
You pulled out a stat in a recent whitepaper
151
00:07:04,490 --> 00:07:06,142
that I read that you had written recently,
152
00:07:06,142 --> 00:07:07,760
talking about small businesses
153
00:07:07,760 --> 00:07:12,231
employing nearly 46% of the private sector workforce.
154
00:07:12,231 --> 00:07:16,018
I'm not sure a lot of people understand the magnitude of what
155
00:07:16,018 --> 00:07:16,819
that means,
156
00:07:16,819 --> 00:07:17,487
and I'm assuming
157
00:07:17,487 -->
00:07:21,441
that means in the US, 62 million Americans, 89% of net
158
00:07:21,441 --> 00:07:25,111
job creation between March 2023 and 2024 is how you put it.
159
00:07:25,261 --> 00:07:26,512
That's a staggering number
160
00:07:26,512 --> 00:07:29,132
that I'm not sure a lot of people really knew or know.
161
00:07:29,132 --> 00:07:30,766
Anthony, thank you for reading my paper.
162
00:07:31,851 --> 00:07:32,935
It was great.
163
00:07:32,935 --> 00:07:33,920
I really enjoyed reading it.
164
00:07:33,920 --> 00:07:35,388
What is so exciting
165
00:07:35,388 --> 00:07:37,557
is the small business here in America
166
00:07:37,557 --> 00:07:39,709
is the lifeblood of our economy.
167
00:07:39,709 --> 00:07:40,409
And in fact,
168
00:07:40,409 --> 00:07:44,597
we're seeing entrepreneurship today at all time records,
169
00:07:44,597 --> 00:07:45,264
which portends
170
00:07:45,264 --> 00:07:49,168
for a very bright future for the US and the US economy.
171
00:07:49,702 --> 00:07:52,788
But yes, when you're driving down the highway,
172
00:07:52,972 --> 00:07:54,023
you look to the left,
173
00:07:54,023 --> 00:07:54,941
you look to the right,
174
00:07:54,941 --> 00:07:57,660
and you see these names on the side of the buildings
175
00:07:57,660 --> 00:08:01,464
and you scratch your head and say, I wonder what they even do.
176
00:08:01,497 --> 00:08:01,948
Yeah,
177
00:08:01,948 --> 00:08:02,965
a lot of times
178
00:08:02,965 --> 00:08:05,485
they might actually find their way into my portfolio.
179
00:08:05,485 --> 00:08:09,322
I mean, we have a discovery name on our portfolio for a reason.
180
00:08:09,622 --> 00:08:12,859
We got to go out there and kick tires and try to uncover
181
00:08:12,859 --> 00:08:15,862
value for our clients each and every day,
182
00:08:15,928 --> 00:08:19,615
and it's a great opportunity to see America
183
00:08:19,615 --> 00:08:22,618
find these opportunities that are out of the limelight,
184
00:08:22,885 --> 00:08:25,705
but have real deep discounts to intrinsic value.
185
00:08:25,705 --> 00:08:27,240
Cool. That's amazing.
186
00:08:27,240 --> 00:08:29,509
Before we get into last thing, just a quick note for our viewers,
187
00:08:29,509 --> 00:08:30,693
our chief investment officer here,
188
00:08:30,693 --> 00:08:32,845
and I think we mentioned this before,
189
00:08:32,845 --> 00:08:35,665
we have, an attractive view on equities overall,
190
00:08:35,665 --> 00:08:38,034
but a neutral view across size segments
191
00:08:38,034 --> 00:08:41,187
just because of, outperformance is what they're calling it here.
192
00:08:41,187 --> 00:08:42,138
There's a lot more information
193
00:08:42,138 --> 00:08:43,472
which I'll share at the end of the show.
194
00:08:43,472 --> 00:08:46,459
But given your view and your stance on small caps,
195
00:08:46,609 --> 00:08:48,594
where do you see the risks?
196
00:08:48,594 --> 00:08:51,597
The rewards for investors who put it
197
00:08:51,747 --> 00:08:52,732
within their portfolio,
198
00:08:52,732 --> 00:08:55,368
especially small cap value, which we're talking about?
199
00:08:55,368 --> 00:08:57,353
I think what's great about value,
200
00:08:57,353 --> 00:09:00,990
and I wrote this in a commentary, is you want to marry
201
00:09:00,990 --> 00:09:04,377
your small cap value manager and only date your small cap growth.
202
00:09:05,511 --> 00:09:08,481
And the reason why is the evidence points
203
00:09:08,481 --> 00:09:12,835
to a very high Sharpe ratio for small cap value managers,
204
00:09:13,052 --> 00:09:15,888
the diversification across all the different sectors is
205
00:09:15,888 --> 00:09:18,925
a incredible, powerful thing for investors
206
00:09:19,609 --> 00:09:22,194
because small cap growth tends to be concentrated
207
00:09:22,194 --> 00:09:25,197
in a few sectors, like technology and health care.
208
00:09:25,798 --> 00:09:29,669
Value has a much more broad sense of diversification
209
00:09:29,669 --> 00:09:30,953
across sectors.
210
00:09:30,953 --> 00:09:34,707
And what's even more exciting is the growth dynamic is very,
211
00:09:34,974 --> 00:09:35,808
exciting.
212
00:09:35,808 --> 00:09:39,145
We've seen our portfolios over the long time
213
00:09:39,478 --> 00:09:42,198
compound at roughly 12% per annum,
214
00:09:42,198 --> 00:09:46,052
and it's a very great way for clients to handle longevity risk.
215
00:09:46,052 --> 00:09:46,552
Yeah.
216
00:09:46,552 --> 00:09:50,723
And right now, even more exciting is you're getting that growth,
217
00:09:50,957 --> 00:09:51,741
that long term
218
00:09:51,741 --> 00:09:54,927
growth at a deep discount relative to historical forward
219
00:09:54,927 --> 00:09:56,178
trading multiples.
220
00:09:56,178 --> 00:09:58,798
Right now trading at 12 times earnings.
221
00:09:58,798 --> 00:10:03,302
We're seeing this asset class trade below its long term
222
00:10:03,302 --> 00:10:08,207
return and valuation levels of 15 to 16 times forward.
223
00:10:08,808 --> 00:10:10,443
We find a great opportunity right now
224
00:10:10,443 --> 00:10:12,261
to think about small cap value for your clients.
225
00:10:12,261 --> 00:10:13,462
Yeah 12 times earnings.
226
00:10:13,462 --> 00:10:15,798
It's it's you know that's that's nothing to sneeze at.
227
00:10:15,798 --> 00:10:16,799
That's pretty great.
228
00:10:16,799 --> 00:10:19,502
And clearly you know over the last decade small cap
229
00:10:19,502 --> 00:10:21,020
value stocks have certainly staged
230
00:10:21,020 --> 00:10:21,687
a resurgence,
231
00:10:21,687 --> 00:10:24,690
as evidenced by what we saw since 2022 up and through
232
00:10:24,924 --> 00:10:26,309
now, Jeremy, thanks very much.
233
00:10:26,309 --> 00:10:28,227
Really compelling conversation.
234
00:10:28,227 --> 00:10:30,029
Great opportunities within the space.
235
00:10:30,029 --> 00:10:31,731
Thanks for coming by and sharing your insights with us.
236
00:10:31,731 --> 00:10:32,732
Thank you for the opportunity. Right.
237
00:10:32,732 --> 00:10:35,184
Jeremy Javidi, again from Columbia Threadneedle.
238
00:10:35,184 --> 00:10:36,202
Thank you all for joining us.
239
00:10:36,202 --> 00:10:37,136
There's a lot more information
240
00:10:37,136 --> 00:10:38,754
coming out of our chief investment
241
00:10:38,754 --> 00:10:40,823
office here at UBS and our great partners
242
00:10:40,823 --> 00:10:44,627
at Columbia Threadneedle and our website ubs.com/views.
243
00:10:44,627 --> 00:10:47,363
You'll find videos, podcasts, written reports, etc.
244
00:10:47,363 --> 00:10:49,432
plus you can follow us on social media.
245
00:10:49,432 --> 00:10:50,966
We're on LinkedIn and Facebook.
246
00:10:50,966 --> 00:10:53,569
Plus the studio has its own dedicated Instagram channel.
247
00:10:53,569 --> 00:10:55,554
Give us a follow at @UBStrending.
248
00:10:55,554 --> 00:10:56,872
Great content there for you.
249
00:10:56,872 --> 00:10:57,440
And as always,
250
00:10:57,440 --> 00:10:58,674
if you do have any questions about what
251
00:10:58,674 --> 00:11:00,092
Jeremy and I spoke about today,
252
00:11:00,092 --> 00:11:02,628
please make sure that you continue this conversation
253
00:11:02,628 --> 00:11:05,431
with your financial advisor. Until next time, I'm Anthony Pastore.
254
00:11:05,431 --> 00:11:07,083
We wish you a great rest of your day,
255
00:11:07,083 --> 00:11:08,784
and remember to keep your eyes on what's trending.
256
00:11:08,784 --> 00:11:09,869
We'll see you soon, everybody. Thanks.