What can the Alternative Investment Market (AIM) teach us?

In 1995, the AIM market was born. AIM - which stands for the Alternative Investment Market - is the London Stock Exchange's market for small and medium sized growth companies. It is 30 this year. What is in store for the next 30 years?

Interestingly, reviewing market trends between1965 and 1995 would not have been of any help in predicting AIM’s trajectory over its first 30 years. More useful would have been spotting some of the 1995 emerging trends. Windows 95 was released. And the internet was fully privatised. With the advantage of hindsight, we can see that in 1995, Microsoft had all the ingredients to grow into a global agent of change.

We can use similar insight now - to tease out the prospects for AIM. All we need is to identify the key trends that are starting to bite… and then be bold in our projections. A lot can happen in thirty years.

Many refer to the globalisation decades as being the Goldilocks years. The fable has it that Goldilocks found a bowl of porridge, that was neither too hot, nor too cold. And so, it has been with globalisation. Economic conditions have been just right. And assets have delivered supernormal returns – for decades and decades.

But we should be wary. The Goldilocks story ends badly. Three bears turn up. And they aren’t happy.

What happens if unhappy bears return? Ten years ago, the electorates expressed displeasure with globalisation. Brexit and Trump were votes against the status quo.

But it takes a long time to displace the status quo. In Microsoft’s case, ten years in, internet usage was still a tiny fraction of what it is today. Microsoft may have already become something of a global monopoly. But in 2005, the implications of the internet whirlwind to come were largely unrecognised.

And so it is with the retreat of Globalisation. In case we haven’t got the message, the US electorate have voted in Trump again. And this time with Congress and The House of Representatives.  It’s a clean sweep.

Below the surface, there’s a gnawing anxiety within stock markets. Renewed nationalism. Protectionism.

Economic conditions are no longer just right. In 2022 they wavered into being too hot. Central banks steered to cut off inflation. Maybe global economics is now lurching towards deflation, a term used to describe a general fall in the price of goods and services, and being too cold? Investors know that market trends are vulnerable. But what will the market trends be in the future?

We can never be too certain about the future. But sometimes insight can be glimpsed - identifying what is coming to an end and contemplating something different.

• The past was dominated by very large companies (mega caps). Perhaps we can assume small and micro companies will have a larger role from here?
• A mighty two thirds of global company shares (equities) are currently listed in the US. So, we could anticipate that other exchanges, such as the UK, may be favoured in the future.
• Bountiful cheap debt is currently taken for granted. So maybe we should expect credit rationing in the future?

Globalisation has delivered us a market positioning full of jeopardy. for example, the magnificent seven companies present a very specific risk given that, as a group, they make up such as large proportion of the US stock market. These are the group of technology companies which include Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. With most of these companies operating in the same industry, there is a greater risk for investors who may have exposure to all of these companies through their investments should the industry as a whole be impacted negatively.

Furthermore, passive strategies, which are investments that aim to replicate the performance of a specific index, only work when the markets themselves appreciate, and markets sometimes spend decades flatlining.

This is where AIM comes in. If there are bears around, AIM is a market full of diversification. Should adverse geopolitical events occur, some AIM companies will suffer. But equally, others will get lucky. Some could appreciate by a multiple of their current share price.

We would expect more listed companies to acquire overindebted, but otherwise solvent companies, debt-free from the receiver and often for a nominal sum.

Acquiring businesses at distressed valuations can generate substantial value. For example, HSBC’s acquisition of SVB UK for £1, may have added £5bn of value. Great for HSBC, other than it was already £140bn in market capitalisation (the total market value of the company’s shares) at the time.

Further down the market capitalisation range, the maths works better. A £1bn AIM company acquiring a business that adds £500m of value is a lot more uplifting. And in the case of some of the smallest companies listed on AIM, these deals can be ‘transformational’.

So, as with Microsoft in 1995, the seeds of change are sown. Markets are moving beyond Goldilocks and globalisation. We believe we’re about to navigate the return of the three bears. Note the UK exchange has been outperforming the US ever since Trump was inaugurated. Note too, that UK-quoted small companies are now outperforming the rising UK larger companies. Over recent weeks, the AIM exchange has started to deliver some of the best returns globally. Microsoft was only $400m in terms of market capitalisation when it first listed. Within AIM maybe we have another. Or it’s about to list on AIM. The UK is lucky to have AIM. A lot can happen in 30 years.