AIM Report 2019

Market update / Portfolio performance 20 21 Liquidity remains robust Unless portfolios are very large it should be possible to liquidate a well-diversified AIM portfolio very quickly, perhaps within a week, assuming normal market conditions. But, in crisis conditions AIM can be vulnerable to investors reining in their risk appetite and selling off perceived smaller/riskier companies. Once that sell-off happens liquidity can dry up. 20 AIM trading slowed in the first half of 2019 compared to the previous year, with the average daily value of shares traded per company quoted on AIM fluctuating between £233.5 million and £257.7 million in the first five months of the year. That compares poorly with the first five months of 2018, when all but one had an average daily value higher than £280 million. However, by December 2018 it had dipped to £208.6 million – almost £100 million lower than April 2018’s £302 million. But, to put this in context, the daily average in 2016 was just £129.3 million. 21 Another potential impact on AIM in mid-2019 was the fallout from the suspension of trading of the Woodford Equity Income fund. Although this is listed on the main market, Neil Woodford has been a longtime supporter of alternative investments and in the days after the suspension, contagion reached certain AIM stocks backed by him. For example, stocks in pharma company Circassia, mattress manufacturer Eve Sleep and Eddie Stobart – all backed by Woodford – were all reported to be down by over 9% in the week of the suspension. 22 Standing the test of time One key consideration when looking at the recent trends in AIM is to remember that, overall, longer term returns still look very attractive and stand up to scrutiny when compared to other markets. While AIM is clearly more volatile because of the relative youth and smaller size and assets of many of the companies listed on it, the market has stood the test of time over the long term. Even after the volatility at the end of 2018, AIM’s market value stood at £91.3 billion. While that was down by over £15 billion on 2017, it was still at that point the third highest market value that AIM had achieved at the end of any year since its inception in 1995. By May 2019, its market value had reached £104 billion. Nonetheless, research commissioned by the Financial Times to mark AIM’s 20th anniversary in 2015 found that investors would have lost money in 72% of all the companies ever to have listed on AIM at that time. 23 Picking the winners is therefore a critical, but also highly skilled, aspect when investing in AIM. As Paul Marsh at London Business School, who carried out the FT’s research, put it: “With more losers than winners, the people least equipped to sort the wheat from the chaff are private investors, and the people best equipped are the professional fund managers.” TOTAL VALUE OF EQUITIES TRADED ON AIM SOURCE: LONDON STOCK EXCHANGE £30,000m £20,000m £25,000m £10,000m £5,000m £0 £15,000m Jan-May 2019 Jan-May 2018 Jan-May 2017 Jan-May 2016 Jan-May 2015 Jan-May 2014 Jan-May 2013 Jan-May 2012 Jan-May 2011 Jan-May 2010 Total Value How AIM benefits from lack of stamp duty As Britain faces a dramatic change in its trading relationships and uncertainty puts the brakes on investment, we can’t put off long overdue reforms to our tax system any longer. Stamp duty on shares was put on the chopping block by then-Chancellor John Major in 1990. It was due to be scrapped in 1991 with the introduction of the London Stock Exchange’s paperless dealing system, TAURUS. Unfortunately, TAURUS was delayed, then scrapped, earning Stamp Duty on Shares a near 30 year stay of execution. For shares trading on AIM, stamp duty was rightly abolished in 2014, on the basis that the index is a “recognised growth market”. To be classed as a ’recognised growth market’, the majority of companies traded on that market must have a respective market capitalisation below £170 million. As AIM matures and larger companies remain on the index, we could be moving towards a place where AIM is no longer exempt from stamp duty. But in the meantime, AIM’s special exemption from stamp duty is strikingly beneficial when considering the negative effects it has on the main markets: First, by levying a 0.5% tax every time a share changes hands it depresses share prices and in turn makes raising finance through issuing equity more expensive. Second, it distorts investment. It discourages investment in firms that turn over frequently, it deters investment in riskier firms where there’s a higher premium on liquidity, and as foreign incorporated firms are exempt, it leads to an excess number of overseas takeovers of British firms. Third, while the evidence is somewhat mixed, transaction taxes can increase daily share price volatility. The 0.5% extra cost may discourage trading on slight changes in value, leading to sudden shifts in price. One study found that when Australia halved its stamp duty equivalent, share price volatility fell by 25%. The arguments against stamp duty are stronger now than they were almost 30 years ago when abolition was first touted. This is because technological progress has driven down transaction costs, increasing the relative importance of stamp duty as a source of transaction costs. In a review of the evidence, the Institute of Fiscal Studies estimates a 10% fall in transaction costs would lead to a 10-15% rise in turnover. Oxera economics estimates the abolition of stamp duty would boost share prices on the main markets by 7.2%, while the IFS suggest a range between 3.5% and 14% depending on share turnover and dividend yields. This discourages equity investment and encourages debt finance, reducing financial stability. Unlike other taxes on capital such as corporation tax, there are no investment allowances on offer. The key barrier to abolition is the cost. The £3.5bn a year it brings in isn’t chump change. But in reality, abolition might be cheaper than you think. If the impacts on turnover and share prices are at the upper end of estimates, then the cost of halving the rate could be reduced by 70%. If abolition boosted growth as most estimates suggest, then other sources of revenue would increase. AIM, on the other hand, already reaps the rewards of stamp duty abolition. Sam Dumitriu Research Director, The Entrepreneurs Network Market update / Thought leadership