AIM stocks have hit hardest by weakening investor sentiment: the gap between their operational performance, relative and share price performance now looks hard to ignore.
- The FTSE AIM market has fallen 12.1% over the past 12 months compared to a 16.1% rise for the FTSE 100.
- Economic strife is always expected to hit smaller businesses first, but this hasn’t happened so far in this cycle.
- The funding environment has improved considerably with many more investors willing to back secondary fund raising.
It has been a dismal time for AIM stocks. Sentiment towards the smallest stocks in the market has been hit by a combination of familiar problems – waning confidence, impaired liquidity and fears over economic slowdown. The FTSE AIM market has fallen 12.1% over the past 12 months. For context, the FTSE 100 is up 16.1% over the same period, while small caps are up 5.3%.
Certainly, there are reasons to worry about some of the AIM market’s largest stocks. Sliding disposable income is likely to hurt online retailers such as Boohoo and ASOS, for example, or travel group Jet2. However, the AIM market has more breadth than is sometimes perceived: it has renewable energy group ITM Power or bioscience group Abcam among its largest companies.
Economic strife is always expected to hit smaller businesses first. With just a handful of business lines, they are naturally seen as vulnerable. However, this hasn’t materialised in practice. A recent survey by UHY Hacker Young shows that there were just three insolvencies for AIM-listed companies in the 12 months to 31 March 2022. That compares to six last year. There were 16x as many insolvencies in the last financial crisis if 2007/8.
There are tangible reasons why the landscape for AIM companies is different today. The funding environment has improved considerably with many more investors willing to back secondary fund raising. This means that AIM companies aren’t going bust because of short- term cash flow disruption. Also, the pandemic was a vast test for many companies. If they have survived, it is because they have been agile and reengineered their business successfully.
AIM investing has been disappointing in recent years with share prices often not reflecting operational performance. Yet the sector has an important role for many clients as both a tool to manage inheritance tax, to diversify portfolios and as a source of high growth stocks. Sentiment appears to be more out of sync with the operational performance and risk than it has been for some time. It may be a moment to look again.
