The first quarter of 2010 has been a frustrating time for investors in small AIM shares. After a strong performance for many share prices at the end of 2009 and into January of this year, worries about the impending election and the effect of the Government deficit on future spending budgets have had a negative effect on many smaller company share prices, particularly those exposed to the domestic economy. This, together with one or two isolated profit warnings, has meant that performance so far this year has been disappointing at a time when the trading news from companies has continued to improve.
However, this good trading news reinforces our view that smaller companies have been getting on with their lives despite all the uncertainties which we all read about in the newspapers daily. The recent reporting season produced good figures from the majority of our investors' holdings in smaller companies, and has in many cases led to upgrades in forecasts for the current year. However, the overall tone of statements remains cautious, as management teams recognise that a general election is likely to produce a hiatus and that there are no prizes for over-cooking expectations. In particular, the share prices of companies with exposure to the public sector have been depressed, despite announcements showing new contracts or progress being made. We believe there will be opportunities for analysts to further upgrade forecasts when the political landscape becomes clearer.
The AIM Index has increased by 7.5% in the first three months of this year, compared to 5.4% for the All share Index and 1.1% for the Small Cap (excluding investment trusts) Index. The latter shows how adverse sentiment has been towards smaller companies generally. The exception is the distinctly positive performance of resource stocks, which represent over 30% of the AIM index and account for much of the index's movement.The good performance of the FTSE All Share can be explained by investor appetite for large companies, particularly those with overseas exposure. The figures are even more striking over six months, with the All Share Index up by 10.5% and the Small Cap Index (Ex Investment Trusts) down by 7.1% over the same period. (See graph below).
However, we believe that sentiment towards domestic companies will improve as the year progresses. The latest statistics suggest that the UK economy was reviving at the end of 2009…
