TRANSKRİPT 🔗
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When people talk about artificial intelligence,
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they usually think of the biggest tech companies,
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especially those in the Mag 7.
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But what if I told you that as an investor,
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you might also want to go smaller
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and maybe a little more regional?
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But we're talking about small cap stocks.
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Want to know why?
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Stay tuned for this episode of UBS Trending.
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Hi everyone, and welcome to UBS Trending.
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I'm Anthony Pastore.
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Thanks for joining me here in the studio.
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Once again,
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my guest for today's small cap conversation
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and the opportunities therein.
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Jeremy Javidi,
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who is a Senior Portfolio Manager with Columbia Threadneedle.
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Jeremy, nice to have you in the studio. Good to see you.
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Thank you. Anthony.
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You, you know,
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you and I were just talking a little bit beforehand.
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There's so much going on within equities in general.
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And we talk about the Mag 7 quite a lot.
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It's hard to ignore the performance.
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There has been unbelievably stellar for a couple of years now.
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The Nasdaq itself and the technology side, it's
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just unbelievable.
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But people
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sort of forget to talk about
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what's happening on the smaller side.
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There's so many small businesses that are I direct
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and AI adjacent,
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providing critical components to the bigger Mag 7 companies.
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I'm just really just high leveling it here.
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Talk about with us as we get started, the performance
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of small caps of what you've seen as you cover them.
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For Columbia Threadneedle, it's just an incredibly
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powerful story to watch.
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What's been happening there.
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I completely agree with you, Anthony.
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The key to small cap value and small cap companies in general
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is their association with the US economy.
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They are the fabric of American exceptionalism.
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And when the US economy is doing well,
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small cap companies fundamentals improve.
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And we know that the market always tracks fundamentals over time.
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So when you take a look at this chart right here, what you'll see
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is coming out of that 2022
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doldrums of that tech implosion.
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We started to see the US improve as inflation
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started to wind down.
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And what we're seeing now in those two really deep red bars
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is the AI contribution to the US economy coming through
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directly into the fundamentals of small cap value companies?
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Because not only are we seeing these exceptional gains,
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we're actually seeing multiples compress
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because the earnings are what driving these total returns.
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Yeah.
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I mean just looking at the last
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the tail end of that, that's Q1 and Q2 of this year.
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I mean, growth is just it's going through the roof.
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It's but here's the here's the question then,
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because when you look at the overall economic picture,
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the fed just raised rates 25 basis points
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recently here at UBS, our chief investment office expects
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another rate hike likely in December, likely another 25
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basis points.
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And historically, the word on the street is always well,
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as rates go higher, it impacts the smaller companies first.
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A lot of them are highly levered.
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They borrow against, you know, their own businesses.
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What do you say to that?
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I hear that misnomer all the time.
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It's something that people continue to press me on.
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Jeremy, rates are going up.
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That's a bad thing.
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It really depends on what rates are going up.
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Because if you look at the long end of the curve, rates
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going up in the long term explains economic expansion.
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Load full transcript
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So the economy is growing really strong.
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The long end rise is because of their competition for capital.
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But what that really means is fundamentals are very robust.
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What I'm more worried about is when the long end falls,
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which signaling economic contraction,
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which usually is a poor signal for forward earnings
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for small cap companies. Right.
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The US right now with the fed moving up short
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term rates a little bit, is causing a little bit of a curve's
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flattening.
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That doesn't worry me whatsoever.
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Are there any particular economic trends
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that you're seeing right now
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or watching that are giving you that confidence
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that we're that small cap? Still have room?
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Oh, the signal absolutely to watch is us
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PMI is associated with manufacturing.
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And this right here is a long term chart going back to 2002
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looking at the economic expansion of manufacturing.
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That KPI is really important to watch because it associates
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with the breadth and depth of small cap earnings.
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And as you know, markets track fundamentals.
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When we see that line over 50
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that's signaling manufacturing expansion.
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Manufacturing expansion
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has a higher proponent of earnings than it does in the U.S.
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economy.
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U.S. economy manufacturing's 10%.
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In small cap earnings.
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It's about 20%.
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But it also has the velocity and a multiplier across
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many different sectors and industries
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that have an even greater magnitude.
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It's been a long time that U.S.
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manufacturing has been below that 50 line.
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Really since the third quarter of 22.
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But now since the beginning of the year that number is now
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signaling expansion
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once again,
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really providing a great catalyst to earnings going forward.
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Yeah. It's amazing.
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I hadn't seen this chart until we were sitting down for today.
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And I just
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I guess I didn't remember or realize that we had been seeing
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a lack of expansion in manufacturing since 2023.
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So it is amazing to see in 2026 there's pop.
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So again, that goes right to what you're saying.
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Is your confidence in small caps but looking okay.
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Bigger picture here with all the AI, the hyperscalers
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there are issues on that side of the story as well.
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We have electricity demand, lack of it, or lack of electricity
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while demand increases.
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I should say we have these data centers that, you know,
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it's become sort of a four letter word.
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It's become sort of a political, you know, kind of conversation.
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Now, do you see any of that playing any kind of hindrance
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towards the growth in small cap?
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Because there are a lot of small cap names
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that are playing in the AI space.
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How much of that is tied to these hyperscalers and their growth?
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Certainly, there's been no single area that's been more dynamic
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than the AI growth over the last couple three years.
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We see that across the whole economy.
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So certainly the momentum there is not just strong,
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but we see that accelerating even into next year.
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We're talking to all these small cap companies.
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Their backlogs are growing.
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They're seeing opportunities not just for linear growth
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but exponential growth.
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And that is truly revolutionary and exciting for the US economy.
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You pulled out a stat in a recent whitepaper
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that I read that you had written recently,
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talking about small businesses
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employing nearly 46% of the private sector workforce.
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I'm not sure a lot of people understand the magnitude of what
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that means,
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and I'm assuming
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that means in the US, 62 million Americans, 89% of net
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job creation between March 2023 and 2024 is how you put it.
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That's a staggering number
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that I'm not sure a lot of people really knew or know.
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Anthony, thank you for reading my paper.
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It was great.
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I really enjoyed reading it.
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What is so exciting
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is the small business here in America
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is the lifeblood of our economy.
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And in fact,
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we're seeing entrepreneurship today at all time records,
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which portends
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for a very bright future for the US and the US economy.
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But yes, when you're driving down the highway,
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you look to the left,
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you look to the right,
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and you see these names on the side of the buildings
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and you scratch your head and say, I wonder what they even do.
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Yeah,
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a lot of times
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they might actually find their way into my portfolio.
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I mean, we have a discovery name on our portfolio for a reason.
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We got to go out there and kick tires and try to uncover
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value for our clients each and every day,
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and it's a great opportunity to see America
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find these opportunities that are out of the limelight,
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but have real deep discounts to intrinsic value.
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Cool. That's amazing.
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Before we get into last thing, just a quick note for our viewers,
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our chief investment officer here,
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and I think we mentioned this before,
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we have, an attractive view on equities overall,
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but a neutral view across size segments
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just because of, outperformance is what they're calling it here.
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There's a lot more information
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which I'll share at the end of the show.
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But given your view and your stance on small caps,
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where do you see the risks?
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The rewards for investors who put it
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within their portfolio,
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especially small cap value, which we're talking about?
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I think what's great about value,
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and I wrote this in a commentary, is you want to marry
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your small cap value manager and only date your small cap growth.
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And the reason why is the evidence points
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to a very high Sharpe ratio for small cap value managers,
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the diversification across all the different sectors is
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a incredible, powerful thing for investors
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because small cap growth tends to be concentrated
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in a few sectors, like technology and health care.
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Value has a much more broad sense of diversification
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across sectors.
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And what's even more exciting is the growth dynamic is very,
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exciting.
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We've seen our portfolios over the long time
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compound at roughly 12% per annum,
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and it's a very great way for clients to handle longevity risk.
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Yeah.
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And right now, even more exciting is you're getting that growth,
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that long term
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growth at a deep discount relative to historical forward
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trading multiples.
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Right now trading at 12 times earnings.
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We're seeing this asset class trade below its long term
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return and valuation levels of 15 to 16 times forward.
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We find a great opportunity right now
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to think about small cap value for your clients.
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Yeah 12 times earnings.
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It's it's you know that's that's nothing to sneeze at.
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That's pretty great.
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And clearly you know over the last decade small cap
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value stocks have certainly staged
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a resurgence,
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as evidenced by what we saw since 2022 up and through
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now, Jeremy, thanks very much.
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Really compelling conversation.
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Great opportunities within the space.
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Thanks for coming by and sharing your insights with us.
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Thank you for the opportunity. Right.
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Jeremy Javidi, again from Columbia Threadneedle.
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Thank you all for joining us.
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There's a lot more information
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coming out of our chief investment
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office here at UBS and our great partners
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at Columbia Threadneedle and our website ubs.com/views.
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You'll find videos, podcasts, written reports, etc.
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plus you can follow us on social media.
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We're on LinkedIn and Facebook.
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Plus the studio has its own dedicated Instagram channel.
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Give us a follow at @UBStrending.
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Great content there for you.
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And as always,
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if you do have any questions about what
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Jeremy and I spoke about today,
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please make sure that you continue this conversation
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with your financial advisor. Until next time, I'm Anthony Pastore.
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We wish you a great rest of your day,
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and remember to keep your eyes on what's trending.
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We'll see you soon, everybody. Thanks.