David A. Nadal, Director of International Research and Portfolio Manager at Royce & Associates (a subsidiary of Legg Mason Global Asset Management) shares his outlook for the global small to mid cap sector and why he believes these companies make a good investment right now.

Questions:
What is the outlook for the global small to mid cap universe over the next two to three years?
- Outlook is quite positive
- Non-US small to mid cap stocks have undergone a period of extended underperformance pushing valuations to very low levels with high dividend yields
- Decent possibility that bond bubble will burst over the next two to three years, giving rise to a reallocation of assets towards equities
- Small to mid cap companies are well positioned in this fast changing economy as they are more agile and innovative compared to their large cap counterparts

Which countries or regions do you see the most opportunities at the moment?
- Stronger markets at the moment include Germany, Japan and South Africa
- Being value investors, they expect to see more opportunities in places that are very out of favour currently, such as Italy, Spain and Greece in the future

Are there any sectors or themes that you are particularly bullish on?
- Quite bullish on the natural resources sector as monetary easing is creating a very positive pricing dynamic for things that are in finite or declining supply such as gold, silver and oil
- The Legg Mason Royce Global Smaller Companies Fund is exposed to gold and silver mining companies, oil services companies and think the pricing environment for such commodities will be supported by monetary regimes over the next two to three years

On the other hand, are there any investment ideas you are not so keen to pursue?
- Quite wary of sectors that are heavily levered as leverage during tough times tend to constrain growth, leading to decreases in market share
- Hence sectors like banking, telecommunication, media, REITs, and utilities that are more levered and have low return on invested capital are not favoured in the fund