By Ben Turney
I am not a fan of London’s Alternative Investment Market and have serious doubts if the model can survive in the long run. It is too cannibalistic, the regulatory model is fundamentally flawed and the valuation model relies far more on the manic behaviour of crowds rather than actual growth generated by true company performance. Worst of all, I fear that as a method of capital allocation, AIM is horrifically wasteful and inevitably destroys shareholder value over time.
However I would be a fool not to acknowledge what is currently happening in the market right now as there could be a significant trading opportunity brewing.
One thing that AIM has always needed is fresh blood to push prices higher. Thanks to yesterday’s announcement by the Treasury it looks like it is about to get it.
Already announced in a previous Budget, the Treasury has now released the results of its consultation about ISA qualifying investments. In summary they intend to extend the range of qualifying ISA investments to include company shares “trading on a recognised stock exchange within the EEA (European Economic Area)”. In other words speculators (and I deliberately don’t use the word “investors”) will soon be able utilise their annual ISA allowance of £11,520 in AIM listed stock. The Treasury’s plan is to introduce legislation to Parliament later this month, which is expected to take effect shortly after.
Although the troubles afflicting the resource sector have been a global phenomenon (just look at Australia’s ASX and Canada’s TSX Venture Exchange to witness even worse carnage), the timing of this news for AIM could be highly providential. Given how low volume has been in this market over 2013, this change in the rules concerning ISA qualification could have a sizeable impact on share prices.
Unfortunately, like many others, I recognised the severity of the bear market in AIM resource stocks too late. I did manage to sell out of most things in the second half of last year, but things were too far gone for me to attempt to short with any confidence. So I decided to wait.
Broadly speaking I was looking for three signals before getting back into this market. These are:-
1. Signs that precious metals have found a floor and are starting to rally (I believe the collapse in precious metals has been the most damaging to sentiment towards resource stocks; how else to explain that oil stocks have been as badly affected by the bear market, when the price of crude has stayed around $100/brl?)
2. Signs of corporate capitulation (there are too many exceptionally poor businesses listed in the small cap arena, which are little more than dead weight holding the market back)
3. Signs of fresh money coming into the market (with volume as low as it has been, it shouldn’t take that much to get things popping again)
It is a bit early to say that this list has been definitively confirmed, but on all three counts there are indications that the market is getting ready to turn.
Starting with precious metals, on Friday gold temporarily fell through $1,200/oz, a crucial long term level of technical support. It has since rallied and if it goes on to stage a mini recovery (let’s say back to $1,400/oz), then this could do wonders for investor sentiment. After all so many private investors love nothing better than to buy back in to something which has already risen a lot!
Next, looking at corporate capitulation, there have been a string of recent RNS announcements in which companies have sold projects at rock bottom prices, relinquished exploration licenses or have been forced to mothball operations. Although there hasn’t yet been a noticeable increase in the number of de-listings, I put this down more to the fact that companies pay annual exchange fees. Once paid up they are listed for the year. For several business I can think of, the acid test will come when they are next required to renew.
Finally, I had been waiting for a sign that new money could be about to enter the market. Thanks to the specific plan to extend the range of qualifying ISA investments, I believe this is in place.
It may still take some time before we see any significant movement in resource stocks, but now looks like a good time to start buying back into this battered sector. Attempting to call a bottom in this horrible market has proven to be extremely treacherous in the last twelve months, so I am a little tentative. Each time it seemed prices couldn’t go any lower they nosedived again.
So while there are still obvious downside risks, with the right selection there could be fantastic profits to be made over the next two years. My primary watchlist contains a number of stocks with healthy cash balances (or the funding in place to survive at least twelve months) and projects, which could easily generate investor excitement. By next summer, the combination of these two factors should hopefully see many of these trading at a multiple of their current value.