AIM Industry Report 2017/18

16 17 Many smaller businesses are already feeling the effects of a volatile pound, making imports of materials more expensive and driving inflation. What’s more, those firms trading internationally risk losing existing customers to competitors within the EU, as well as a portion of their skills base, should a hard Brexit be the outcome of the negotiations. This has led some to look at how they recruit and train staff in an attempt to attract more British people to fill vacancies, with others considering automating the way they work. In fact, 35% of SMEs have changed or will change their direction post-Brexit, with about one in seven stating that they are recruiting in a different way 15 . Nevertheless, even exit scenarios at the hard end of the Brexit equation might have hidden benefits for UK SMEs: Looking to mitigate less favourable trading terms with the EU, some SMEs have now been motivated to put greater effort into research and links beyond the EU and the 85% of the global economy which sits outside it. And an environment with higher EU trade barriers could also remove European competition to domestic suppliers to UK manufacturers and consumers. Even full withdrawal from the single market would give UK companies greater scope to lobby for state aid and contracts from the UK Government, currently outlawed by single market rules. SMEs are better placed to react quickly to changes than their larger counterparts, with less working parts and the potential for more limited internal bureaucracy and inflexible legacy systems. As BDO puts it, “AIM constituents are well positioned to continue to adapt quickly and to meet the challenges head on 16 . “ “AIM constituents are well positioned to continue to adapt quickly and to meet the challenges head on.” — BDO AIM SECTORWATCH GENERAL ELECTION AND HUNG PARLIAMENT – IMPACT ON SMALL BUSINESSES The impending spectre of Brexit is by no means the only factor contributing to an increase in political uncertainty. The result of the June 2017 general election and the subsequent hung parliament certainly impacted SME confidence thanks to the uncertainty surrounding the policy direction of the newly formed Government, with FSB Small Business Index falling from +15.0 in Q2 2017 to +1.1 in Q3 2017 17 . This was also influenced by the wider economic environment of a weakening domestic economy with inflation increasing the costs of doing business. Yet, the very uncertainty that has battered SME confidence has given SME exporters a boost, thanks to the depreciation of sterling. “For the third quarter in a row, exports have seen a significant and sustained increase, with small firms expecting this trend to continue into the next quarter. While boosted by the sustained depreciation of sterling, this is clear evidence that small businesses are key partners in delivering export-led growth 18 .” In fact, when broken down on a business sector basis, there are other encouraging figures in a number of areas. In addition, despite the high level of economic and political uncertainty, the majority of firms predict no change in capital investment 19 . This is in spite of the Bank of England Q3 2017 Agents’ summary of business conditions, reporting that, “there were signs that credit was becoming slightly more difficult to access for smaller companies in some sectors 20 .” Bringing this back to the AIM market, the expectation after an election with such unexpected results is that AIM ALL-SHARE PERFORMANCE 1 JAN 2016 TO 29 NOV 2017 immediately, volatility increases, particularly on an index with a reputation (whether deserved or not) for high volatility. However, despite pockets of turbulence in areas exposed to the UK consumer in Q3 2017, FTSE’s AIM indices statistics for the three months following the vote largely reflect stability, rather than any extreme changes to price fluctuation. There were 11 AIM IPOs in Q2 2017, while Q3 saw 15 21 . In Q1 2017 there were 20 cancellations (not including transfers to the main market and reverse takeovers) from AIM, followed by 17 22 in the next quarter and 21 in Q3 2017. These figures have remained quite stable, indicating that political uncertainty has done little to persuade companies to postpone or cancel their plans to be quoted and fundraising intentions. Neither did it instigate a significant rush away from AIM. Perhaps the massive upheaval which is due within the next couple of years as a result of Brexit has encouraged firms to make hay while the sun shines, or perhaps it has had a desensitising effect so that otherwise deep shocks are now just not so shocking. SOURCE: FSB VOICE OF SMALL BUSINESS INDEX, Q3 2017 SMALL BUSINESS CONFIDENCE PLUMMETS -10 0 10 20 30 40 SMALL BUSINESS INDEX Q4 2106 8.5 Q1 2017 20 Q2 2017 15 Q3 2017 1.1 APR 2016 587.49 679.18 770.87 862.56 962.56 954.25 1,045.94 JUL 2016 OCT 2016 JAN 2017 APR 2017 JUL 2017 OCT 2017 EU REFERENDM US PRES. ELECTION ARTICLE 50 TRIGGERED UK GENERAL ELECTION SOURCE: LSE “We all need to be broadcasting that there are sensible, good quality companies on AIM, family businesses that have been around for decades.” — JUSTIN WAINE, PUMA INVESTMENTS FSB SMALL BUSINESS INDEX BY SECTOR SOURCE: FSB VOICE OF SMALL BUSINESS INDEX, Q3 2017 REAL ESTATE ACTIVITIES ARTS, ENTERTAINMENT & RECREATION WHOLE & RETAIL TRADE, REPAIR OF MOTOR VEHICLES AND MOTORCYCLES EDUCATION INFORMATION AND COMMUNICATION HUMAN HEALTH AND SOCIAL WORK ACTIVITIES ACCOMMODATION AND FOOD SERVICE ACTIVITIES FINANCIAL AND INSURANCE ACTIVITIES MANUFACTURING PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES CONSTRUCTION AGRICULTURE, FORESTRY AND FISHING -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Q3 2016 Q3 2017 (Small business prospects over coming three months)