By Divya Chowdhury and Ankika Biswas

DAVOS, Switzerland, Jan 21 (Reuters) - Global investment manager Nuveen is betting tariffs and potential tax cuts under U.S. President Donald Trump will lift U.S. small-cap stocks, which have lagged larger peers, this year, its chief investment officer said on Tuesday.

"We like small caps because they're very cheap versus large caps," Nuveen's Saira Malik told the Reuters Global Markets Forum, adding that they were a good portfolio diversification bet as they are focused on domestic markets and consumers.

Chicago-based Nuveen has some $1.3 trillion under management and is a unit of TIAA, whose client base includes many university professors.

Trump's pledges on tariffs were the catalyst the "chronically undervalued" segment needed to play catch-up in the next phase of the ongoing rally in stock markets, Malik said on the sidelines of World Economic Forum's annual meeting in Davos.

She believes a strong dollar, which is negative for multinational corporations and positive for dealmaking, is another factor favouring small-caps.

The Russell 2000 .RUT logged a 10% rise in 2024, lagging the S&P 500's .SPX 23% surge on the back of mega-cap growth-oriented stocks, after the small-cap index got a boost following November's presidential election.

Malik said, however, that the 10-year Treasury yield US10YT=RR breaching 5% could be a hurdle for the next leg-up in equities, with higher volatility likely to stay as investors await clarity on Trump's policy plans.

Malik expects the U.S. Federal Reserve to deliver two rate cuts this year as inflation continues to moderate, even as tariffs posed an inflation risk.

She is also positive on Japan, while India's upbeat growth picture, despite high valuations, made it an attractive bet.

Malik said Nuveen would like to see more follow-through to stimulate China's economy and consumer spending in response to potential U.S. tariffs before making a "big bet" on it.

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(Reporting by Divya Chowdhury in Davos and Ankika Biswas in Bengaluru; Editing by Alexander Smith)

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