Why UK AIM Stocks Are Taking A Battering

9th Oct '24 by Mark Simpson

71 comments 6346 reads

There is no doubt that AIM Stocks have suffered recently. In early summer, the expectation was that inflation had been tamed and the interest rate cycle had turned. This led to some optimism returning to the market, which had been beaten down for so long. Here is what the AIM100 index looks like over three years:

However, that optimism has proven short-lived. The surprise election in July led to an increased focus on what an incoming government would look like and what impact this would have on investors:

The effect on the smallest UK stocks from this uncertainty has been two-pronged. Firstly, it appears to have caused a dip in consumer sentiment. The GfK Consumer Confidence index dropped to -20 in September from -13 the previous month. Expectations for personal finances over the next 12 months, the 12-month outlook for the economy and the major purchase index all fell significantly. The blame has been put on worries about what will be in the Autumn Budget that will be announced on 30^th October. The message from the new government has been that public finances are in dire straits. The view is that the lack of investment in recent years needs to be corrected, and this needs to be funded by tax rises rather than borrowing.

We've seen the impact of this reduced consumer confidence already, with many smaller UK companies warning of challenging market conditions and a number of profit warnings recently. Even companies that haven't warned are saying they expect to be very H2-weighted. In many cases, the market is calling this hope misplaced and marking the shares down anyway.

The second impact is that investors have been getting ahead of what they see as the most likely tax changes. The two that seem to be the most talked about are changes to capital gains tax or the removal of inheritance tax relief on AIM shares. In addition, there may be changes to ISA or SIPP rules and how Oil & Gas profits are taxed.

Capital Gains Tax

The principle of Capital Gains Tax is that any gains made in a tax year above a threshold and outside of tax shelters such as a SIPP or ISA are subject to a tax rate, but investors can offset any losses (outside…

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simoan

18th Oct '24

I do think that there is an overreaction occurring with respect to AIM. To quote from yesterday's Times, 'increasing the rate of capital gains tax on the sale of shares could still generate billions for the Treasury as the bulk of revenues — just over half — come from the sale of unlisted shares in private companies, which enjoy an average gain of just over £120,000. By comparison, the average capital gain on the sale of listed shares is £18,000'.

It’s a political decision though, so it’s all about the optics. Removing illogical tax breaks which have been misused by the rich will go down very well with the vast majority of voters. That’s all you need to know. It doesn’t matter how much additional tax it raises. And for the record, I’m all for the removal of BR on AIM shares. It’s an anomaly that is being used contrary to its original intention and it needs to be abolished.

StrawberryDreams

If i was a fund manager of a non IHT fund and those funds were doing well and had the money i would arrange to buy blocks of shares i like at a lovely valuation off market at a nice discount.However sadly with the UK based fund managers experiencing redemptions that might not be a choice they have.I'm treating it like all the worry in the US (yen carry unwind trade etc..) as in this isn't a fundamental 2008, pandemic type event and we'll just have to see what happens.I understand why people get worried though, but without any firm data it's all a coin toss.Hopefully Reeves' team has actually consulted fund managers, financial instituions etc.. and wargamed/thought this all this all through in advance.If she hasn't labour are losing by a massive swing next time, so they better get a move on making any shorter term changes they want now, as they'll all be reversed in a few years time imo.

john2

I'm not disagreeing with you - the original idea of the relief was that owners of small private businesses could pass them on to their children. I just think that people are exaggerating the effect that removal of the relief would have on AIM shares.

My approach is more simplistic - I don’t know or care whether people are exaggerating or not, although this is what you would expect to happen with social media whenever there is little or no real information available.

What we do know is that there is a “known unknown” coming on a certain date and to prepare accordingly. In my case, that means having a filter ready to sort the wheat from the chaff and to top up existing positions based on valuation only.

Cancun

19th Oct '24

The part that concerns me though , is that not only do you have the selling from the wind up of the IHT funds, but also you permenantly lose the future stream of purchases from that source... hopefully there are no companies on the margin that go out of business...certainly it's not a pro growth policy change...

The part that concerns me though , is that not only do you have the selling from the wind up of the IHT funds, but also you permenantly lose the future stream of purchases from that source

This is my biggest concern with holding AIM shares beyond any short term noise around IHT. Who is the marginal buyer going to be? I don’t know the answer to that if the worst happens. Liquidity is already bad enough on AIM without it reducing further. And when liquidity reduces, spreads generally increase.

timarr

... hopefully there are no companies on the margin that go out of business...certainly it's not a pro growth policy change...

If these companies can only survive because of IHT flows then they would be better off put out of their misery. There's a decent report out by the Tony Blair Institute looking at what needs to be done to reinvigorate the UK markets:

Put bluntly, [the UK's] public markets are not fit for purpose. Bold reform is needed – and needed now. Every day, the global race to discover and bring to market the innovations of the future gathers pace. If the UK does not revitalise its markets, invention and talent will go elsewhere.

However:

Europe now has more than 1,500 startups that are each generating over $25 million in annual revenue. More than 250 of these are generating $100 million to 500 million in revenue – almost half of which are UK-based. If London plays its cards right, it can become the place of choice for this next generation of scaling European tech companies while providing a platform and financing pathway for the UK’s first trillion-dollar tech company.

And:

... the public-listing environment is unfavourable for smaller firms. Low liquidity and insufficient professional-analyst coverage – mid-sized AIM firms have on average a quarter of the analysts covering their US equivalents – are making small and medium-sized listed companies unattractive investment propositions. UK defined-benefit pensions are not only investing less in public markets but are also withdrawing from equity funds, reducing participants and capital in new, innovative companies. This results in lower liquidity for smaller listed firms, making them less appealing to investors and making it harder to raise funds.

Among the recommendations:

Close down AIM and create a rapid route to listing on the LSE’s Main Market with similar, but time-limited, tax and regulatory benefits. AIM has failed in its stated purpose of providing a home for scaling businesses. It should be fully merged with the LSE’s Main Market, with a special route to listing specifically for high-growth firms in emerging technology sectors. In this way, London can differentiate itself from other global exchanges and attract a pipeline of high-quality, innovative companies. Tax benefits for investors, similar to those currently available for AIM-listed companies, should be retained for firms using this route.

https://institute.global/insig...

Well worth a read.

Chris Brown

Some clarification for those asking about the structure of the AIM IHT services. Providers such as Octopus don't run OEICs or unit trusts. Each client will typically be referred through an IFA and have their own ISA and/or GIA wrappers with Octopus. Octopus then invest those wrappers directly in a range of AIM stocks which they expect to qualify for BR. Like a DFM arrangement, as a previous poster mentioned. So the clients won't have identical holdings and portfolio weights. But you can imagine Octopus' selection of AIM stocks won't be huge and most portfolios will look very similar. Ditto for the other providers.

If the BR rules are changed, those portfolios will continue to exist, but it will be up to each client (most often in consultation with their IFA) to decide whether to sell up or continue with it. My 2019 post on this topic suggested that the impact may be similar to the Woodford wind-up, in this case with a gradual stream of outflows as clients re-assess things over the next 6-12 months.

This is assuming AIM BR is scrapped completely. I wonder if they could just tweak the qualifying rules to make it difficult for the larger AIM firms to qualify.

I do think that the original premise of Mark Simpson's article is good, looking at the holdings of the IHT specific funds. As for the AIM shares not included in his list, I think there is far less reason to worry.

And do you really want to be invested in a company which is only being kept alive by a tangential tax relief?

I was merely thinking of the real world effects for job losses etc ... hopefully Stocko and its readership point us away from the more tenuous companies....

BnB

Forgive me for missing the information if it’s available elsewhere on Stocko, but do we have a list of quality companies whose share prices have been battered already by CGT/IHT concerns. They are easy to spot on the chart. Just look for companies whose SP has fallen by around 20% (often) from 52 week highs, starting on or around the beginning of September, not before.

Here is a selection from my fund. And they all look great value already and could be better value still after the 30th, or deliver a good bounce if fears are not met.

Advanced Medical Solutions (LON:AMS)

Tristel (LON:TSTL) (new position)

Alpha International (LON:ALPH)

Ashtead Technology Holdings (LON:AT.)

Cerillion (LON:CER)

Journeo (LON:JNEO)

FW Thorpe (LON:TFW)

Tracsis (LON:TRCS)

Volex (LON:VLX)

All the above are down substantially on no news. Certainly a buying opportunity either before or after the 30th. I just can’t tell which it is!

I’d be grateful for other contributions. Just the good stuff, please.

Willinvest

Hi BnB,

Paul came up with a list of 20 such companies in the SCVR on 20 September.

He introduced the list with this comment: "My thinking being that we could be seeing some irrational, fear & tax-driven selling in UK small caps, whilst US markets rise to new all-time highs, which should be good for UK shares in due course, once the end Oct budget is out of the way"

Hopefully this link will take you there: https://www.stockopedia.com/co...

The before/after question would be a nice one to have an answer to!

20th Oct '24

do we have a list of quality companies whose share prices have been battered already by CGT/IHT concerns. They are easy to spot on the chart. Just look for companies whose SP has fallen by around 20% (often) from 52 week highs, starting on or around the beginning of September, not before.

Well, seeing as it’s a wet Sunday morning here, and I’m at a loose end, below is a list of the worst AIM 100 performers relative to the index since 1st September. You’ll have to make your own mind up which of these are “quality” companies! I agree with you though and recently re-started a position in Tracsis (LON:TRCS):

Super thanks. Certainly a couple more good firms with first rate balance sheets in that list whose price has sunk on no news. I’m drawn to GlobalData (LON:DATA, high PER but very reasonable on a FCF yield basis, and noting the delisting risk inherent in the founder’s 60% stake, Keystone Law (LON:KEYS) - PER has halved from its heyday as a stock, but is it still growing? Bioventix (LON:BVXP) - much more reasonably priced now, but will Troponin or Alzheimer’s provide the spark to lift the SP out of its range-bound trading?

Actually, what strikes me from the list of worst performers is how little overlap there is with the companies Mark mentions in the main article. Maybe we are all looking for something that hasn’t actually started yet with relation to AIM BR at least?

Agreed. In relation to the potential withdrawal of BPR, I’d concentrate attention on names whose valuation is high both relative to the growth rate and also in comparison with other firms in the same sector. James Halstead (LON:JHD) would seem to be the model. And that has hardly slipped at all. From my own list, perhaps FW Thorpe (LON:TFW) would be the best candidate. Meanwhile, it could be that the falls we’ve seen to date are all about CGT planning.

Aislabie

I would be more in favour of AIM than many here although I have no difficulty in agreeing with Yiannos and others that there is some dreadful dross in the market. The original intention that there should be a market with a less onerous entry, in both cost and regulation, is a very good one and I would be sorry to see that lost.
If it has gone awry it seems to be derived from three reasons:-

1. The market has been allowed to fill up with too many start up speculative resource stocks, giving it an image as a wild west gambling casino. It is a familiar way in which small lightly regulated markets seek to grow ( usually unsuccessfully ) to eventual respectability (hello Vancouver).

2. The Nomad fee basis encourages 1. above as there is a clear incentive to float new shares either in an IPO or in a placing. The fees available when managing cash generating smaller companies are much less attractive.

3. Amazingly, somewhere out there are enough buyers who are willing to invest their hard earned money on complete rubbish. You take some care over this dear reader, and so do I, but somebody is doing investing without a smidgen of understanding. The evidence from the meme stock craziness in the US suggests that actually some people want to look on this as gambling, where they think they get better odds than in the casinos.

As I said above I believe there is great value in having a junior market, but I think that it will only work if the Nomads can be remunerated sufficiently to retain their ability and willingness to prevent clearly recognisable chancers from mucking up the market. They must also be able to promote and facilitate the liquidity which prevents larger investors buying in. To this latter point there might be some way to enable larger investors to buy in without having to make a takeover bid, either by stated commitment or by having a parallel non-voting class. I don’t have a complete solution but I still think it is worth trying to find one.

Further to my previous post, GlobalData (LON:DATA) I see a huge spike in volume on Friday, consistent with a large insti seller or the founder himself. It certainly isn’t CGT or BPR-related selling. Looking at the register, I can’t see much in the way of insti ownership, so perhaps it’s the founder. He sold 10m shares in August at 2.25. These have gone for 1.73. Something to ponder.

Bronstein

21st Oct '24

And to think the Labour government claims "growth" is it's number 1 priority. Growth in what I wonder?

littledavesab

2nd Jan

Dr W G Barb was the founder and was not someone to be messed with!

Why UK AIM stocks are taking a battering

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Mark Simpson

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