This year’s 187 per cent ascent in the share price of the $3.44trillion (£2.7trillion) US semiconductor giant Nvidia has been hard to ignore.
But let’s take a moment to focus on the 509 per cent leap in the shares of a less supersized US tech firm – MicroStrategy, a software company which mostly puts money into bitcoin, the world’s largest cryptocurrency.
It has been boosted by the bitcoin mania that ensued from Donald Trump’s election win; suddenly crypto has gained a new respectability.
But the upward trajectory of MicroStrategy and other US small-cap stocks should also serve as an alert to UK investors who may be sceptical about crypto, but sense that they should be adjusting their portfolios ahead of Trump’s arrival at the White House.
MicroStrategy’s share surge reflects the growing conviction that US ‘small-cap’ stocks are set for stardom under the Trump regime, following an era where Nvidia and the other ‘mega-cap’ members of the Magnificent Seven of tech – Alphabet, Amazon, Apple, Meta, Microsoft and Tesla – have so massively enriched shareholders.
‘Small’ in this sense does not mean a ‘mom and pop’ business, but an enterprise worth millions or billions: the average market cap in the Russell 2000 smaller companies index is $3.5billion (£2.8billion).
This index has bounced by more than 15 per cent this year, fuelled by excitement over prospects for lesser-known US companies, and by the latest Bank of America fund manager survey. The respondents to this hugely influential research acknowledge the president-elect’s policies could stoke inflation, meaning that interest rates fall more slowly than was expected.
Nevertheless, they are optimistic about the prospects for all US stocks, in particular believing that smaller domestically-focused companies will be boosted by Trump’s plans to cut taxes and reduce regulation.
Such a move would allow them to compete more ferociously with larger competitors; bureaucracy can impose a disproportionately heavy burden on lesser-sized corporations. The introduction of tariffs on imports could also be a boon to small-caps.
The energy, financial and industrials sectors are seen as the biggest beneficiaries of the array of the populist and other measures that the Trump administration could implement – but the prospects of other types of business could also improve.
Blair Couper, investment director at Abrdn says: ‘Financial companies, like banks, could perform well if rates stay higher for longer. If the cost of borrowing does remain elevated, real estate businesses may be negatively impacted, but this could be offset by Wall Street’s positive reception to Trump’s policies.’
At the same time, the ‘guard rails’ on takeovers could be dismantled, allowing more businesses to be snapped up by predators at lip-smacking premiums.
Wall Street thinks that the current boss of the Federal Trade Commission, Lina Khan, is about to be replaced by an official who would be far happier to preside over a surge in M&A (merger and acquisition) activity.
Already Bank of America analyst Jill Carey Hall has named some potential takeover targets.
The list includes Apogee Enterprises, a maker of architectural glass products, Bread Financial, a lender, and the shipping company Scorpio Tankers.
Other analysts have cited companies like Hims & Hers Health, a telehealth platform whose shares have tumbled in the wake of news that Amazon will also be providing consultations on such issues as hair regeneration.
Hims and Hers is one of the holdings at Legal & General’s L&G Russell 2000 US small-cap quality ETF (exchange traded fund). The fund also has a stake in Mara, a bitcoin ‘miner’.
These outfits process the transaction following the creation of a new bitcoin. Much complex maths is involved in the process.
Also in the portfolio is the Phoenix-based Sprouts Farmers Market, whose shares are up 248 per cent in the last year to $146 thanks to the conviction that more Americans will adopt healthier diets and will be keen to consume this supermarket’s grass-fed beef, organic milk and vegan snacks. Kirsty Desson, manager of Abrdn global smaller companies fund, also highlights a store group – Casey’s, which runs petrol stations on its site, and is the fifth-largest pizza chain in the US.
Desson says: ‘Casey’s operates in rural and small-town locations and targets low to mid-end consumers. In other words, voters most likely to seek to benefit from Trump’s ‘Make America Great Again’ policies.’
Desson likes Wintrust, a Chicago-based regional bank whose shares have jumped by 42 per cent this year. This institution should be able increase its lending and also make the most of consolidation in its sector, as regulation becomes less tight and the pace of M&A picks up. A lack of familiarity with Wintrust and other US small cap names may make a foray into this area seem daunting.
The Magnificent Seven titans are household names whose services we use, or with whose brands we are familiar.
These behemoths have already massively enriched shareholders and there may be more gains to come as the artificial intelligence industrial revolution progresses.
Nevertheless, it seems sensible to try to make the most of the coming trends in the American economy.
I plan to trickle some cash into funds like Artemis US smaller companies, Interactive Investor’s fund recommendation and Premier Miton US opportunities, which is the pick of the Fundcalibre platform.
Jason Hollands of Bestinvest favours this fund too: ‘It’s solid, not racy or speculative; small and mid-cap stocks make up 75 per cent of the portfolio.’
He also suggests the Federated Hermes US SMID equity fund. Its manager, Cormac Weldon, contends that ‘investing in American smaller companies is a way of more directly capturing the intricacies of the US economy’.
More sceptical investors may believe Trump could prove hazardous for the US, since trillions could be added to national debt.
It is worth noting, however, that Trump, a New Yorker, craves the good opinion of Wall Street, which is the city’s most powerful industry. He also knows Americans are gratified by soaring share prices.
The assertion by veteran investor Warren Buffett that you should ‘never bet against America’ has proved largely reliable.
But widening the spreads of these bets from the mega-caps into the small-caps could be wise just now.
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