Wall Street: Small Business, Gateway to the American Economy

Wall Street: Small Business, Gateway to the American Economy

According to experts, small businesses in the United States offer greater diversification than large companies, pride themselves on direct exposure to the domestic economy, which is currently healthier globally, are better positioned to benefit from new trends and are more resistant to external shocks.


Small cap opportunities in the United States

Since the turn of the 20th century, investors have been able to put the US economy cheaply into their portfolios. And Today this opponent has become even more interesting. In fact, according to Bob Kaynor, head of US small- and mid-cap equities at Schroders, small-cap companies abroad have rarely offered such comfortable entry levels in the past compared to large-cap companies. particularly, These small companies filter out a lot of bad news and therefore, for the first time in years, are trading at valuations similar to those in global markets. In practical terms, for the expert, it represents an easier path to the American economy.

Similarity with the recent past

History reinforces this thesis. The last time relative prices were this cheap and sentiment was this low, there was an exceptional period of absolute and relative returns for SMEs. In the seven years after the market peak in March 2000, small-cap stocks rose more than 70%, compared with a rise of less than 10% for large companies. This outperformance occurred during periods when interest rates and the economy were rising and falling, suggesting that outperformance can occur in different economic environments. Clearly, past trends are not a guide to the future howeverKaynor notes, It must be recognized that there are many similarities with the current context.

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Diverse exposure

Small caps and mid caps are also interesting because of the diverse exposure they offerIt is an even more important aspect today given the high concentration and high volatility in the market. For example, the S&P 500 has become increasingly concentrated in a few huge technology companies. In fact, only a small portion of US securities reached a price so high that it exceeded the value of the entire markets. Last August, the “Super-7” stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta) represented a larger portion of the MSCI ACWI World Index than the markets of France, China, the UK and Japan combined. Thus, small businesses in the United States provide more diversified exposure to the external economy Even with a different risk profile.

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In first place to exploit new trends

They are often smaller, locally oriented US companiesaccording to Kaynor. Better positioned to take advantage of new economic trends. Although American consumers continue to resist, their spending is already shifting from goods to services. The goods economy has remained strong during the pandemic, while the services economy has faltered. This hypothesis is to get to the bottom of this Small business profits are highly service oriented, which should increase the relative growth in their profits. Another trend that was evident before the Covid-19 crisis, but has accelerated since then, is increased capital spending in the United States.

Regulations and capital expenditures in favor of

On the other hand, a major initiative to reallocate the supply chain is being implemented as globalization gains further momentum. In this regard, the US administration offers ample incentives to encourage increased national production, stipulated in laws such as the Chip and Science Act and the Inflation Reduction Act of 2022. The 2021 infrastructure bill offers other benefits. These are efforts to reduce emissions and the need to spend on automation to alleviate labor shortages. We should know that outside, Small business sales growth is closely related to capital expenditure growth. This reflects the prevailing local trend of small companies compared to large companies.

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USA beanie hat is large by international standards

Not to mention that Domestic exposure insulates these types of companies from the risks of converting non-US revenues into dollars and makes them more resistant to any external shocks. There is one final factor that is often underestimated: the size of small businesses abroad. As Kaynor recalls, Given the size of the American economy, even small American companies are large by international standards. This is an important factor at a time when investors are rediscovering risks with liquidity tight due to rising interest rates. With market valuations that can reach $20 billion, US small- and mid-cap companies are a liquid and well-traded asset class, and therefore full of opportunity.

by: Fernando Mancini

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