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Looking where everyone else isn't · UBS Trending

• 0:00
  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.
• 0:29
  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.
• 0:44
  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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  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.
• 10:49
  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.
• 10:55
  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.