UK equity markets fell sharply last autumn, and while the main indices have clawed their way back, the Alternative Investment Market (AIM) has noticeably struggled to recover. After more than a year, the growth-focused smaller-cap index is still down around 20 percent on where it was before the slump.

You could argue that a loss of enthusiasm for smaller, more speculative stocks is no surprise in the current climate. Periods of economic unease - currently not helped by Brexit uncertainty - tend to spook growth company investors. So AIM often feels the pain first when sentiment starts to cool.

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Another clue to this protracted slump is that the AIM 100 index of the largest companies on the market has also failed to recover since the pullback last year. As it turns out, some of AIM’s biggest names have come under serious pressure for various reasons over the past 18 months. (Chris Boxall at Fundamental Asset Management expands on this subject here).

Among them has been Burford Capital, the litigation funding specialist and one of AIM’s largest stocks. Its valuation fell from £3.5bn to £1.5bn in just a few weeks at the end of the summer after a shorting attack. Fever-Tree Drinks, the upmarket seller of tonics and other mixers, has also lost some of its fizz. Its valuation has halved to £2.0bn over the past year, although it remains one of AIM’s biggest success stories of recent years. Even ASOS, the online fashion retailer and a long-term AIM favourite, has been out of favour. Its market cap has slid from £4.8bn to £2.6bn over the past 12 months.

What’s interesting about stocks like Fever-Tree and ASOS is that their valuations remain relatively high despite their price falls. Both have been very popular shares in recent years and their valuations arguably carried a lot of expectation. When the market senses trouble (whether it’s to do with the stock or the general outlook), these previously high-momentum shares can sell off sharply. But that doesn’t necessarily mean they become bargains.

To get to the bottom of this, it can be worth calling on a quality checklist to assess the strengths and any weaknesses in a share. Unsurprisingly, some of the highest quality companies on AIM have track records of delivering solid, long-term price gains - so focusing…

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