How we’re playing short-term US market pain

Olivia Micklem, co-manager of Artemis US Smaller Companies fund, explains why it’s been a tricky start to the year for the US stock market, and how domestic stocks could be boosted by Trump’s plans to reduce tax.

26th March 2025 08:38

by Kyle Caldwell from interactive investor

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Olivia Micklem, co-manager of Artemis US Smaller Companies fund, explains why it’s been a tricky start to the year for the US stock market amid uncertainty over President Donald Trump’s tariff policies.

In addition, the area of the market Micklem invests in is trading on a sizeable valuation gap to America’s biggest companies. Micklem explains what she thinks needs to happen for the valuation gap to close, and how domestic stocks could be boosted by Trump’s plans to reduce tax.

Artemis US Smaller Companies is one of interactive investor’s Super 60 investment ideas.

Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Olivia Micklem, co-manager of the Artemis US Smaller Companies fund. Olivia, thank you for your time today.

Olivia Micklem, co-manager of Artemis US Smaller Companies: Thanks for having me.

Kyle Caldwell: So, Olivia, in terms of valuations for US smaller companies versus US large companies, they're at their cheapest level in 30 years. Now, of course, there's been some strong share price gains for the biggest companies in America, the so-called Magnificent Seven. What are the other reasons behind this sizeable valuation gap?

Olivia Micklem: So, a few things have been happening over the last few years that have really driven that discount. It really started after the pandemic with the inflation we saw, leading to a rapid rise in interest rates in early 2022 and onwards.

Generally speaking, smaller companies tend to perform less well in a high rate environment. The cost of growing their businesses, of funding their businesses, gets higher and it makes it more challenging. Over time, it had taken a while for those high interest rates to begin to come down. We finally started to see some of that happening last year, and that certainly helped improve the performance of the small-cap group of companies and improve their valuation. But as you say, the really superb strength we've seen from the Magnificent Seven in terms of the kind of results they've been delivering has continued to mean that the larger end of the market has been much, much stronger.

As we've moved through last year and into this year, we've certainly seen the smaller companies part of the market perform a little bit better as people have started to have some optimism around what the outcome of the election is going to mean in terms of some of the policies we will see from the new Republican administration.

However, it's also come with a little bit of volatility, particularly more recently. I think until you get that confidence that the economy is on the right track, [and] you have all the right opportunities ahead, it will take some time before that valuation gap starts to close. What's exciting for us as portfolio managers and as analysts is that every time you see these opportunities coming at a discounted valuation, that's really exciting for us as stock pickers and as investors because we're finding great opportunities across the market.

Kyle Caldwell: In terms of valuation opportunities, are you seeing them both within your existing portfolio and also outside it in terms of potentially adding to new positions?

Olivia Micklem: Absolutely. We're always looking for new ideas across the market and across different sectors and continue to find interesting ones. But any time that there's volatility in the market, as we've seen in recent weeks, it really gives us an opportunity to take advantage of some of the pullbacks you see in stocks that we really like and being able to add to them at a time where we think the valuations are possibly too low.

Kyle Caldwell: And could you outline some of the opportunities you're seeing at the moment? Could you name some stocks that are trading on cheap valuations?

Olivia Micklem: Absolutely. So, for example, we own a business called Globus Medical Inc Class A (NYSE:GMED). They are a business that makes spinal implants for spinal surgery and other orthopaedic procedures. We think it's a really great business, but for various reasons, we think the valuation is too low and that, to us, is a really exciting opportunity. In a different sector, we own a business called Indie Semiconductor Inc Ordinary Shares - Class A (NASDAQ:INDI). Again, a great business, selling semiconductors into the automotive industry, where we think the valuation is looking really attractive and certainly underestimates the opportunity in the business in our view.

Kyle Caldwell: Donald Trump has returned to the White House. One of his policies is to reduce corporation tax rates for domestic producers. Will this benefit US smaller companies as a whole, or are there certain sectors that will benefit more than others?

Olivia Micklem: So, for all the businesses that are domestically focused, as you say, tax cuts will be a benefit across the board irrespective of sector. There is certainly a lot of appetite for smaller companies to see those tax cuts come through and see the benefit of that. But in addition, some of the tax policies that are potentially on the cards include also income tax cuts as well. So, you'd also see the benefit across the consumer complex of people being able to take more money home in their pocket at the end of the month, and perhaps reinvest that back in the economy in terms of goods and services that they might go and spend on.

Kyle Caldwell: Another of his policies is, of course, tariffs, which are dominating the headlines at the moment. How are tariffs impacting the companies that you hold within the funds?

Olivia Micklem: Well, first and foremost, what we've certainly seen in the market across the board is a lot of volatility. The reason we have seen that is while we know that the tariffs are coming, the specifics of the policies have been moving around quite a lot. So, I think all that uncertainty does tend to create volatility in the market. But for the businesses themselves, until they actually know what the tariffs are going to be, how long they're going to last, and what impact they will have, it's a little bit difficult for them to start making changes in terms of their own strategy, and how they might manage through that.

I think many businesses have plans that they're ready to put in place, but until the firm policies are enacted and we know exactly where we stand, it's a little bit tricky for businesses to do that. So, I think everybody's looking forward to having a little bit more clarity on how those tariffs are likely to work.

Kyle Caldwell: But it will be the more larger companies that earn more money overseas that will be more affected by tariffs?

Olivia Micklem: Potentially, yes, those with global supply chains are certainly more exposed. Nonetheless, there are many businesses that may generate most of their revenue within the US that might manufacture or source some of their goods from overseas. So, there are still parts of the smaller companies part of the market that will also be exposed.

Kyle Caldwell: And do you think Trump's policies, particularly on potentially reducing tax for domestic producers, that'll prove to be a catalyst for US smaller companies?

Olivia Micklem: We certainly hope so. We think that, really, this idea of tax cuts and also deregulation, which is another big part of his policy platform, are very beneficial to smaller companies over time. However, until we get some of, as I say, the clarity on what it's going to look like and certainly get the tariffs put in place, we need to move past some of this near-term volatility before we're going to see the benefit of that play out over time. Nonetheless, we're very excited about what the longer-term opportunity will look like because ultimately the policies are all intended to stimulate the economy and grow the US economy and those businesses that operate there will undoubtedly benefit.

Kyle Caldwell: As you've mentioned, there has been short-term volatility, particularly over the past three months. Why has it been such a tricky period?

Olivia Micklem: The market likes certainty and we don't have a lot of that right now. We have an idea of what some of these policies might look like. We have an idea of what some of the longer-term policies could look like, but nothing's been firmly decided yet.

I think in any situation where you're not entirely clear on where things are going to go, the market becomes a little bit volatile. I think we've had a lot of headlines and a lot of activity, but we really now need things to get firmed up and to know where we stand. I think then, once the market understands that, it's easier for it to price in what those risks and opportunities look like, and it's much easier to move past some of this initial noise.

Kyle Caldwell: In terms of investors who are taking the long-term view, which they should, particularly when you invest in smaller companies, the low valuations are a potentially really good starting point?

Olivia Micklem: Absolutely and I think as stock pickers, any time this sort of volatility appears, it offers us lots of opportunities both with new ideas and to add to existing ones. So, for us, we like to see this as more of an opportunity, and then we're looking over the longer term about what all the benefits of these policies will look like and we're able to buy businesses that might benefit from that at really attractive valuations.

Kyle Caldwell: And finally, do you personally invest in the Artemis US Smaller Companies fund?

Olivia Micklem: Yes, absolutely. We think it's really important to be invested alongside our clients and we're really excited about the long-term opportunity for US smaller companies.

Kyle Caldwell: Thank you for your time today.

Olivia Micklem: Thank you for having me.

Kyle Caldwell: So, that's it for our latest Insider Interview. Hope you've enjoyed it. You can let us know what you think. You can comment. And for more videos in the series, do hit that subscribe button. And I'll hopefully see you again.

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