Reviewing market trends between 1965 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 30 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, 10 years in, internet usage was still a tiny fraction of what it is today. Microsoft may have already become something of 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 market anxiety. Renewed nationalism and protectionism mean 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 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 mega-caps. Perhaps we can assume small and micro-caps will have a larger role from here?
A mighty two-thirds of global equities are currently US listed. 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. With the Magnificent Seven, stock-specific risk is off the scale. And with most operating in the same industry sector to boot, correlation is a giant risk, currently.
Furthermore, passive strategies only work when asset markets appreciate. And markets sometimes spend decades flatlining. Ask the Japanese for further details. Market beta can be worthless.
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 stocks will suffer. But equally, others will get lucky. Some could appreciate by a multiple of their current share price.
Better still, AIM stocks are backed by risk capital. Ordinary share capital doesn’t have a fixed repayment date. Pity those with giant debts in the next recession. 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 terms at the time.
Further down the market capitalisation range, the maths works better. A £1bn AIM stock acquiring a business that adds £500m of value is a lot more uplifting. And in the case of some AIM-listed micro-caps, 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 caps are now outperforming the rising UK majors.
Over recent weeks, the AIM exchange has started to deliver some of the best returns globally. Microsoft was only $400m in terms of market cap 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.
Gervais Williams is head of equities at Premier Miton. The views expressed above should not be taken as investment advice.