Citywire - For Professional Investors

Register to get unlimited access to all of Citywire’s fund manager database. Registration is free and only takes a minute.

Why we're upbeat about US Smid-cap stocks: Hermes expert

Why we're upbeat about US Smid-cap stocks: Hermes expert

Hermes Investment Management is upbeat about the growth of US small-and mid-cap (Smid) stocks due to the country’s supportive economic policies as well as the solid economic outlook.

Mark Sherlock, head of US equities at the fund house, told Citywire Asia that two of four major economic policies – the reduction of corporate tax rates and the repatriation of overseas dollars -- introduced by the Trump administration, will particularly benefit Smid-cap companies going forward.

‘The Trump administration has proposed that the US corporate tax rate would be reduced from 35% to 15%, I don’t think this will happen, but a possible reduction in corporate tax rate from 35% to 25% is more likely.

‘That change will benefit the economy and companies in general. It will specifically benefit Smid-cap companies,’ said Sherlock, adding that this is because Smid-cap companies are the ones paying a higher tax rate compared to some large-caps.

According to the manager, large-cap international businesses have clever tax structures. They will usually not pay the highest rate of 35% corporate tax, since a part of their money sits outside of the US. Therefore, this part of the money is not taxable within the country.

M&A deals increasing potential

Following this point, Sherlock further explained the repatriation of the overseas US dollar policy. ‘There are between two and three trillion US dollars currently sitting with companies overseas, what will happen when that part of the money comes back? 

‘One would expect that a large portion of that money will be invested in capital equipment, new plant machines and perhaps to hire new people; the companies may also buy back their own stocks.

‘But more importantly for those large-cap multinationals, they may go out and spend money on M&A deals. They will buy a number of small but fast-growing businesses to meet their own needs.’

Sherlock said that his strategy involves stocks of around 60 companies, and normally within one year, two or three of the stocks will be bought by a larger company.

'I think should repatriation occur or the money flow back to the US, maybe the two or three businesses in our strategy will be bought, because companies wanted to do something with their money.’

Strong US growth 

According to Sherlock, Smid-cap firms have a higher level of exposure to the domestic US economy than large-caps, therefore, a strong US economic environment will benefit the Smid-cap market. 

The manager is optimistic about the US economy. ‘If you look at a series of economic indicators, their pickup still remains strong; if you look at the unemployment rate, it is still under 5%; and if you look at some of the wage growth surveys, they are promising. 

‘We’ve seen consumer sentiment at a high level; a spike in small businesses sentiment and also the stabilisation or improvement in housing value.

‘Many investors in the US have exposure to the stock market through their retirement or investment plans, and they have participated in the growth of the stock markets in the last few years.'

The manager said that all of these economic indicators have shown that the US economy is in a solid place. ‘We don’t foresee an imminent recession and we think for the next two or three years, the US economy will set a firm tone.’

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Events
  • Citywire Asia Bangkok Retreat 2018: day one images

    Citywire Asia Bangkok Retreat 2018: day one images

  • Citywire Asia Bangkok Retreat 2018: day two images

    Citywire Asia Bangkok Retreat 2018: day two images

  • Citywire Asia Taipei Retreat 2017: day one images

    Citywire Asia Taipei Retreat 2017: day one images

  • Citywire Asia Taipei Retreat 2017: day two images

    Citywire Asia Taipei Retreat 2017: day two images

  • Citywire Asia Bangkok Retreat 2017: day one images

    Citywire Asia Bangkok Retreat 2017: day one images

  • Citywire Asia Bangkok Retreat 2017: day two images

    Citywire Asia Bangkok Retreat 2017: day two images

  • Images from Citywire Thailand Forum 2017

    Images from Citywire Thailand Forum 2017

  • Citywire Asia Awards 2017: images from Singapore

    Citywire Asia Awards 2017: images from Singapore

  • Citywire Asia Awards 2017: images from Hong Kong

    Citywire Asia Awards 2017: images from Hong Kong

  • Citywire Asia Retreat in Bangkok: day two images

    Citywire Asia Retreat in Bangkok: day two images

  • Bangkok buzz: day 1 images from our Asia Retreat

    Bangkok buzz: day 1 images from our Asia Retreat

  • Images from Citywire's Thailand Forum

    Images from Citywire's Thailand Forum

  • Pictures from Citywire's Hong Kong forum

    Pictures from Citywire's Hong Kong forum

  • Images from our Citywire Singapore Forum

    Images from our Citywire Singapore Forum