US small caps well placed to weather Brexit-led gyrations, says Aberdeen
WHILE global financial markets are likely to remain nervous after UK citizens voted to exit the European Union (“Brexit”), there are positive trends in the United States that will support US small caps, according to Aberdeen Asset Management Company.
Last month’s payroll data suggest a US expansion that, while still lacking in conviction, is robust enough to handle global shocks.
Hiring is up, unemployment is still below 5 per cent and, most important, wages are firming.
This resilience is reflected in the relative strength of small-cap fundamentals as well as increasingly attractive valuations. Almost 80 per cent of their revenues are in domestic areas, according to Philadelphia-based fund manager Timothy Skiendzielewski, who runs US small caps for Aberdeen Group.
Small caps’ relative insularity means that unlike their larger brethren they have less sensitivity to the US dollar, whose value first seesawed in the wake of China’s slowdown.
A strong dollar hurts US exports.
They have also fallen to a discount as Wall Street tests new highs, for the first time since 2003. Traditionally the asset class attracts a premium for its faster growth prospects.
Large-cap outperformance had rested in good part on cheap money helping to fund buybacks and merger-and-acquisition activity.
Slower sales now threaten the sustainability of underlying earnings growth and support for today’s valuations. Small caps, on the other hand, continue to invest.
Aberdeen launched a US small-cap fund last October – the Aberdeen American Growth-Smaller Companies Fund (ABAGS). The fund has shown strong performance and was up by more than 10 per cent in the three months ending in May.
ABAGS’ master fund, the Aberdeen Global-North American Smaller Companies Fund, has consistently ranked in the top quartile of its peer group in its five-and-a-half-year life.
Skiendzielewski said Aberdeen Asset Management was keeping a close eye on the fundamentals of its holdings, which up to this point have remained sound.
“Granted, there are numerous things to worry about. Brexit has highlighted weaknesses at the heart of the European project.
“Some of the same geopolitical themes lie behind the upcoming US presidential election, which has already been one of the most divisive campaigns in memory.
“Our job as fund managers is to keep a cool head, and I believe with volatility climbing once again there will be opportunities to pick up mis-priced stocks.
“So often we find US small caps fly under the radar when mainstream markets become unsettled. Investors should stay similarly focused.”
Aberdeen is promoting ABAGS from today to August 11. Every Bt100,000 invested during the period qualifies for free bonus units in the Aberdeen Cash Creation Fund worth Bt100. Conditions apply. The fund’s risk is Level 6.
