While the economy will eventually dip back into a recession, Sherlock is optimistic it remains an issue that will come years down the line with recent promises of corporate tax cuts and deregulation bolstering small business confidence.
Speaking at a roundtable on Tuesday morning, he added the anticipated rise in US interest rates later this year will not be as big a drag on small and mid-cap companies as investors may expect.
The manager expressed pride in the tendency of his asset class to outperform large-cap stocks and long-term corporate and government bonds over a 50-year period.
Sherlock, lead portfolio manager of the Hermes US Small and Mid-Cap Fund, said: “Smaller company stocks outperform large caps at the beginning of a rate rise, but later on in the cycle when the Fed wants to contract the economy then they may suffer.”
Small caps saw an average of 13% returns when interest rates rose between 1963 and 2012, more than the returns of large caps (8.1%) and long-term government bonds (2.7%), he noted.
Similarly, import tariffs put in place by the Trump administration would benefit smaller US companies in the short term, but the manager is worried about the long-term impact on efficiency in the domestic market.
Claiming that recently elected Trump is “unanalysable”, Sherlock urged people to stop “wasting time” trying to second-guess the president’s plans and instead focus on investing in promising sectors.
He includes materials, energy, industrials and regional banks as the market sectors reaping the advantages of a Trump-inspired infrastructure spending boom with the likes of aggregate business Martin Marietta high on his list of promising firms due to its ability to build local economy monopolies, have high volumes available and come with strong margins.
