Does AIM’s underperformance v the wider market now offer opportunity?

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You will have seen our post on Friday that we believe that the FTSE350 mining sector is materially undervalued; in this post, we look at the wider AIM index.

AIM is of course a general “risk-on” play. With a whole heap of small companies across many sectors, there is little correlation with the FTSE 100 or FTSE 350. Given the nature of small companies they tend to be event driven stocks too – highly likely to re-rate on good or bad news at specific points in their development cycle. As well as being absolutely insider riven and, as we have seen this year with many minnows – HMV, PMK, MCHL, CWR etc etc in some cases headed by seemingly corrupt and shockingly woeful management

Of course since the early 2000’s there has been a big move to list more and more resources stocks, and so AIM does have more of a correlation with the mining sector. But there is also a general steep decline in the volumes traded over the past 5 years – not that surprising as five years ago was 2007 and the height of the bull market. Below is a table showing the annual value traded in millions of pounds in AIM stocks.

We can see a gradual recovery in volumes and this year should top £40 billion of trades the way things look 3 quarters in.

Let’s take a look at the chart below of the AIM index relative to the FTSE 100. Since May this year we can see that there has been a disjoint in the relative performance with the FTSE 100 12% better off than the AIM index. Over the last 10 years, this is one of the most extreme moves between the 2 indices. Clearly, the ‘risk-off’ environment with the disastrous macro-economic background has contributed to this. With more positivity on the domestic economic front in recent weeks however, together with the heavily weighted mining and oil sector showing signs of renewed strength – this suggests a decent move up by AIM is possible over the next few months.

Even better, if you are long on an event driven stock that has positive news, then you may well be in a very sweet spot, with a general index re-rate and also a stock specific re-rate. Time to get searching! EMED Mining is my pick.


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