The latest survey by New Horizon Aircraft reveals that 75% of fund managers specializing in the small and micro-cap segment believe the interest rate cut cycle initiated by the U.S. Federal Reserve (Fed) will considerably benefit the valuation of these companies. This survey included fund managers from the U.S., Canada, Europe, the Middle East, and Asia, who collectively manage assets worth $82.4 billion.
Another conclusion from this survey is that 59% of managers believe the Fed will cut rates at least once more in 2024, while 16% think there will be only one more rate cut before the year ends. Additionally, fund managers expect the Fed to continue with cuts: 19% anticipate three cuts in 2025, 59% expect two cuts, and 20% predict only one cut.
According to the survey’s authors, this expectation of multiple rate cuts aligns with 82% of the surveyed managers who believe U.S. interest rates will have fallen from the current 4.9% to 4.3% or lower by the end of 2025. Approximately 14% even think the rate could drop below 4.1%.
Since 40% of the debt of companies in the Russell 2000 Index is short-term or variable rate, compared to around 9% for companies in the S&P, 89% of fund managers expect that the anticipated drop in interest rates will have a more positive impact on the valuations of micro and small-cap companies than on large-cap companies. Seven percent of fund managers were unsure, and only 4% disagreed.
Experts caution that although U.S. inflation decelerated to 2.5% year-over-year as of August 2024, it still remains above the Federal Reserve’s 2% target. Nevertheless, 89% of respondents believe the 2% target will be achieved within the next 12 months, specifically in the second quarter of 2025.
The survey authors emphasize that these perspectives bode well for the valuations of micro and small-cap companies, as evidenced by the 99% of respondents who expect the economy in 2024 and 2025 to provide a more favorable basis for the valuations of these smaller firms. In the current context, with global small-cap companies trading at the steepest discount to large caps in over 20 years, the same proportion (99%) of fund managers expect micro and small companies to generate solid returns over the next 12 months.
“Expected Fed rate cuts could significantly benefit small and micro-cap companies. This view is shared by the fund managers who participated in our research, all of whom specialize in managing funds that invest in emerging small and micro-cap companies with high growth potential. Small-cap companies with unique and transformative technologies are once again in a position to offer investors an opportunity for significant gains,” concludes Brandon Robinson, CEO of Horizon Aircraft.
For Funds Society, Madrid