14 December 2018
Amidst the sell-off in the last two months, there have been few places to hide. November saw losses across all segments of the UK stock market, but the selling pressure has not been evenly distributed. With the weakness in GBP, large cap stocks which are heavily dependent on export earnings did relatively better, but uncertainty surrounding prospects for the global economy still caused declines. Mid and small caps saw greater weakness, influenced by their perceived dependency on the domestic economy where sentiment is mired in Brexit fears. However, by some margin, the weakest area of the stock market has been AIM, with the 50 largest stocks in that universe seeing the greatest pressure – down just over 7% in index terms against an All-Share decline of just over 2%. This has involved a de-rating of some of the fastest growing companies in the UK stock market, and whilst possible reasons for this were discussed last month, the trend seems to be continuing. That may in no small part be due to the fact that the UK has fallen to an aggregate 12 month forward price earnings multiple of just over 11x as a consequence of the Brexit process, making it one of the cheapest developed stock markets in the world. Premium valuations have therefore been brought into sharp contrast, even if the fundamental prospects for these companies have not yet deteriorated. This re-pricing process may well continue until such time as the political and economic prospects for the UK become clearer, and investor confidence returns.
Despite the pressure on AIM, which represents around 50% of portfolio exposure, the fund slightly outperformed with a decline of 1.6% versus a benchmark drop of 1.8%. Major contributors to this included a number of AIM stocks which shrugged off the sentiment headwind by announcing positive trading news. Vanadium miner, Bushveld, released a quarterly trading update where lower production volumes were mitigated by significantly higher vanadium prices, driven by demand for energy storage batteries. Automotive engineer, AB Dynamics, reported strong final results reflecting the growth in Advanced Driver Assistance System equipment and the development of autonomous vehicles. North Sea oil & gas producer, Serica, announced the satisfaction of US sanction conditions relating to its interest in the Rhum field, which it shares with the Iranian Oil Company. Cake Box, the specialist retailer of cream cakes announced maiden results with UK franchise stores now numbering over 100. The major detractors to performance featured high profile AIM growth stocks such as Accesso and Learning Technologies, as well as Scapa, the global adhesive tapes specialist which experienced downgrades due to the non-cash contract costs of a transfer of R&D and manufacturing assets involving its recent healthcare acquisition, Systagenix. The fund’s position in Fevertree was sold during the month.
The selling pressures on AIM saw the fund fall 4.4% in the month, compared to a benchmark decline of 3.7%. The underperformance was focused on a number of high profile AIM growth stocks such as Accesso, Learning Technologies, Quixant, Frontier and Keywords. The biggest faller was Accesso (-24%), despite the company announcing trading partnerships with Google, Groupon and Village Roadshow Theme Parks, in recent weeks; followed by Learning Technologies (-14%) which received significant upgrades following its interim results in late September. Offsetting the declines was a very strong performance by automotive engineer AB Dynamics (+34%), which reported strong final results reflecting the growth in Advanced Driver Assistance System equipment and the development of autonomous vehicles. A new qualifying investment was taken in Falanx, a political intelligence and cyber security business which has recently partnered with a large NASDAQ-listed provider of network threat monitoring software. This relationship has the potential to transform the group’s growth prospects.