July AiM Market Musings from Stephen English, Investment Director

In meetings with clients we often find them receptive to the premise that UK equities are cheap, and small-caps especially so, only then to be asked “where’s the catalyst?”. The question is a reasonable one but not easy to answer. A common retort that ‘value always outs eventually” can be blithely countered with “in the long run we are all dead”. Yet increasingly there are real catalysts…
It started with companies buying their own shares back as a buyer of last resort. Given current valuations this has been highly accretive to remaining shareholders which is unusual given buybacks are normally conducted procyclically at multi-year highs.

This has been followed up by increasing takeover activity, through both trade and private equity buyers. Broker Peel Hunt calculates that in H1 alone, there have been 31 bids (>£100m market cap) worth a combined £24bn. Of the 31 transactions, 13 were in the FTSE 250, 6 in the FTSE SmallCap and 8 on AIM. The average premium paid has been 39%, ahead of historical norms, such is the cheapness on offer.


Most recently a third buyer has entered the fray as large asset allocators reassess their large overweight in US assets, in the wake of capricious leadership and volatile trade policy. The ‘Great Rotation’ away from US assets will likely have profound implications for passives versus actives, the value of the dollar, and relative US performance versus the rest of the world. Indeed we are already hearing and seeing a notable pickup in interest from US and overseas investors across the AIM market. With the US still a prodigious 71.5% of the MSCI World Index versus the UK at 3.8%, even the tiniest trickle of fund flows would have profound implications for a market our size.

When the “Two Fs” of Flows and Fundamentals align, good things normally happen.

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