17 September 2018
Global stock markets appear to have struck a proverbial speed bump in early October. Whenever a sharp correction occurs, questions about catalysts are usually the first to be asked. At this juncture, there appears to be no specific data point or geo-political event involved. However this overlooks what has been evident for some time, which is that markets have had a great run and are exposed to profit-taking. Momentum in the UK actually started rolling over from early June, with the Full List on a declining trend and AIM tracking sideways. When so many investors have made so much money, there is the obvious risk of a lack of new buyers when sentiment changes, or in other words of poor market liquidity. Having outperformed the Full List in recent months, AIM has been punished the most in this sell-off, but another contributor to this has been the fact that earnings multiples for some of its constituents have become amongst the highest in the UK market. Just as growth company valuations have come under pressure in the US, with a sell-off in tech stocks, so this has translated into a de-rating of some leading names on AIM. Also feeding market nervousness has been the “known-unknowns” of Brexit, tariff wars and political uncertainty; plus some fundamental shifts pointing to a change in economic climate, including rising inflation and interest rates in the US, and a deteriorating high street and housing market in the UK. Given the variety of catalysts for the sell-off, market volatility looks here to stay.
The fund fell 1.4% in the month, underperforming a benchmark drop of 1.0%. The biggest declines included derivatives platform provider, IG Group, which dropped 30% over the month. Initially the shares fell around 10% due to a statement that the impact of the new ESMA rules in Europe relating to limits on leverage and the prohibition of binary options would reduce revenues by 10% as had been expected. But then the CEO resigned unexpectedly without a clear explanation, and this has left the shares in a state of apparent limbo. Other significant fallers included drugs group, Alliance Pharma, although this position was sold mostly ahead of the fall; AI software specialist, Seeing Machines, which announced further issues for its Fleet hardware business; floor coverings supplier, Victoria, which had a positive trading update but suffered a de-rating similar to other growth stocks; and opioid dependency treatment specialist, Indivior, which continued to experience problems with generic competition. The positions in Alliance Pharma and Indivior have been sold. Noteworthy positive contributors included elearning and talent management provider, Learning Technologies, and fast fashion retailer, boohoo, both of which enjoyed material gains in response to strong half-year results despite the pressures on premium rated stocks. Vanadium miner, Bushveld, also benefited from positive interim figures and the resolution of a strike at the mine. New positions were added during the month in discount retailer, B&M European, which is rapidly rolling out a UK store network, and oil and gas producer, Hurricane Energy, which is developing one of the largest North Sea prospects of the last 20 years.
The fund gained 4.0% in the month, significantly outperforming a benchmark fall of 0.5%. Whilst the market’s de-rating of growth stocks was evident in declines for gaming technology specialist, Quixant, conference call software developer, LoopUp, identity management software and data specialist, GB Group, and social housing maintenance service provider, Bilby, none of these companies has disappointed in terms of current trading. Outperformance for the month was driven by the significant gains generated by e-learning and talent management provider, Learning Technologies, US hospital insurance billing software specialist, Craneware, and computer games publisher, Frontier Developments, each of which announced positive results.