If we look at the returns from the various UK equity indices, a few things jump out.
A strong 12 months
The first is how strong the 12 month returns are: the FTSE100 is up 22 per cent while AIM has risen by an excellent 27 per cent. However we need to be a little careful here because the start of 2016 was the worst on record for equity markets – so the starting point is unusually flattering. We will get a similar effect in a few months time when we look at returns which use last June as the base date, due to the sharp decline after the referendum which was almost immediately reversed. This goes to show how important it is to stay in the market during temporary shakeouts. Panic selling often means foregoing strong returns in the recovery phase. Equally, if you have some cash to deploy during one of these market swoons, then the returns can be very juicy as we can see.
The second point is the much better tone in large caps over the last year. This mainly reflects two things – their high overseas exposure which has become more valuable with sterling’s devaluation and the strong recovery from the resources sector. The miners and oils hit bottom a year ago and started a sustained recovery. The longer-term returns from the FTSE 100 are still lacklustre however.
AIM to the fore
Third, small caps have clearly been doing pretty well. The main market FTSE Small Cap index looks good over all time frames, while AIM has had a really eye-catching 12 months with that 27 per cent. AIM’s travails over the years have been well documented but there are few encouraging things going on which suggest performance going forward could maintain this improved trend.
The rebound in resources will continue to help AIM. Although the sector is much reduced in size nowadays (which is healthy), it still accounts for 14 per cent of the AIM market. Another help will be the reduction in the number of companies on the market. At the end of December there were 982 stocks listed on AIM compared with 1,044 a year ago. Nine years ago at the peak in 2007 we had 1,694 stocks on the market. This attrition, together with subdued new issue activity has resulted in an overall improvement in quality. Weaker companies have been weeded out and it’s the stronger ones that have been able to raise capital.
Quality is improving
The AIM return was also helped last year by a particularly strong performance from some of its largest constituents. The likes of ASOS, Fevertree, Boohoo and Burford are £1 billion plus market caps and would reside in Mid 250 if they had full listings. Again this is another pointer to some of the quality available on the AIM market. Among the AIM smaller caps there’s also plenty of quality available, much of it at more reasonable valuations than those four large AIM superstar stocks.
Momentum warrants respect
As we have moved into the new year the market’s momentum has remained positive. The UK economy still seems quite perky, despite all the political uncertainty. Importantly the US market continues to make new all time highs with the venerable Dow Jones Industrials breaking the 20,000 barrier. As an aside, the Dow and the FTSE 100 traded at the same level of 1,100 during 1984 and our market has only just broken 7,000! Mr Trump’s corporate tax proposals could continue to lend support to Wall Street and there seems to be a good feel about the US economy and stock market. This should provide a positive backdrop as we move into 2017. At some stage we will have the inevitable pause or shakeout, but I’m happy to stick with it for now.