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Small business owners in the US are showing historically high levels of optimism, according to the latest data from NFIB Research Foundation.

The Index of Small Business Optimism rose by 0.7 points in February, rising to 107.6, the second highest level recorded in the index’s 45-year history (the record goes to a reading of 108.0 in 1983).

In particular, smaller companies reported that they were planning to see higher sales, increase capital spending and increase employment. 

The number of small business owners expecting higher real sales volumes rose 3 per cent, reaching 28 percent - the best readings since the onset of the financial crisis in 2007.

Planned capital spending was also up. A total of 66 percent of small businesses reported plans to increase capital expenditure, the highest reading in 14 years.

Among those increasing capex, 45 percent said they were spending on new equipment (up 1 point), 30 percent acquiring vehicles (up 2 points), and 15 percent improving or expanding facilities (down 1 point). In addition, 15 percent spent money for new fixtures and furniture (up 2 points). 

‘The pickup in capital spending is a very favourable sign,’ notes the NFIB report. ‘Capital spending (crucial for improved productivity) fell way behind from 2009 to 2016. Improved capital spending signals increased confidence in the future of the economy.’

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According to NFIB Chief Economist Bill Dunkelberg: ‘The fact that several components saw significant increases tells us that small businesses are flourishing in a way we haven’t seen in over a decade.’

This optimism seems to be, in part, driven by tax reform. As NFIB President and CEO Juanita Duggan notes: ‘The historically high readings indicate that policy changes – lower taxes and fewer regulations – are transformative for small businesses.’ 

The number of small businesses reporting taxes as their primary business problem was at the lowest number since 2006. Since January’s survey, the percentage of business reporting taxes as the single most important problem has fallen dramatically. However, it remains midway between the survey’s historic high and historic low. 

 

Gaining exposure to US small-caps

Jason Hollands, managing director of Tilney Bestinvest notes that while ‘most investors get their exposure to the US through funds focused on large, S&P 500 companies and often via index trackers,’ there are ‘typically very international businesses and arguably less exposed to momentum seen in the US domestic economy.’ Alongside a fund or tracker giving exposure to large US companies, Hollands says it ‘can make good sense to tack on a US smaller companies fund.’

Adrian Lowcock, investment director at Architas, the fund manager, also suggests using active funds to gain exposure to this area. ‘You need a manager to filter through the noise and find those hidden gems as more often than not smaller companies either don’t realise their potential or worse still fail,’ he says.

Lowcock notes that right now Schroder US Mid Cap has caught his eye. The fund, he says, takes a cautious approach. This has meant it has lagged during the strong bull market, ‘but over time should be rewarded,’ Lowcock says.

Hollands points to Hermes US SMID Equity fund, which invests in both smaller companies and mid-caps.

‘The approach is relatively defensive, with a focus on quality growth companies with strong balance sheets which the managers look to pick up when they are trading at a 20% discount to what the team assess as their intrinsic value.,’ says Hollands. 

As an added bonus, Hollands notes, ‘around 30 per cent of the Hermes fund is currently in financials which should benefit from a rising rate environment as margins expand on lending activity.’ 

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