2008 has been a particularly sobering year for the Aim market. For the first time since it was inaugurated in 1995 Aim is likely to end the year with fewer companies on its books than it began with and those that are left will be feeling particularly chastened by the performance of the market over the year.
Aim is the natural home of the smaller company looking for capital to execute a rapid growth strategy and it has performed this function with admirable success for more than a decade. But this year, as the economy has rapidly crunched into reverse gear the smaller companies who occupy the Aim market have felt the pinch more sharply than most. And investors have withdrawn rapidly from the riskier end of the market.
The net result is a slump in the value of the Aim All Share index of more than 60 per cent over the calendar year to early December. The slide in investor confidence in smaller companies has been reflected in the FTSE Small Cap index which has slipped by almost 50 per cent over the calendar year. The slide in the Aim market has been particularly pronounced in the second half of the year as the resources boom has unravelled rapidly. Aim had become a favourite haunt of smaller natural resources stocks looking for funding for their exploration projects and those without actual production have been hit particularly hard by the sell-off. As Paul Mumford of Cavendish Asset Management told us: "It's a funny situation, but when you see Rio Tinto going from £70 to £10 a share then it puts the whole thing in perspective."
This collapse in confidence has hit the driver of Aim's growth in recent years, the Initial Public Offerings market which effectively dried up over the autumn. October was the first month for 10 years in which no new money was raised on Aim. The main victims of this withering of the new issues market have been the brokers who had built rapidly growing operations on the back of active IPO markets.
In total Aim will only record around 100 new issues in 2008 compared with 284 in 2007 with the amount raised in new issues falling to £1.1bn from £6.6bn the previous year. With an increasing number of companies being forced to delist by financial problems, consolidating with rivals in a bid to survive, and some companies continuing to graduate to the full list Aim is expected to end the year with around 1,590 companies having peaked at 1,694 earlier this year.
So what are the prospects for Aim in 2009? Many investment professionals have, for the time being at least, turned their back on the junior market after having been badly burned this year and it will take some time for confidence to return. This lack of confidence is also likely to reflect in a moribund new issues market in the first half of 2009 at least. Companies will find it difficult to find sufficient support to raise significant amounts for new issues while confidence is shot to pieces so, faced with the prospect of putting a lowly valuation on their company or waiting another 12 months, most will shy away.
Indeed 2009 could see another year of negative growth for Aim as the worsening economic climate coupled with the lack of liquidity at the lower end of the market, where investors are increasingly thin on the ground, forces more companies to delist or consolidate. Indeed market professionals such as Invesco Perpetual UK Smaller Companies fund manager Andy Crossley think Aim could shed as many as 300 companies over the next three years. And Sam Smith, managing director of broker FinnCap told Investors Chronicle recently that the Aim market needs to shrink back to around 1,000 companies before it is taken seriously by investors once again.
With the recession widely predicted to last through the whole of 2009 it appears as though the Aim market is in for a rather tough year. This time around, such has been the collapse in confidence among smaller companies investors, the Aim and FTSE Small Cap markets are likely to lag the larger companies indices in their recovery.
Nevertheless, Aim is not the complete train wreck its performance statistics suggest. There are plenty of companies with cash in the bank, solid trading performance and a very good chance of trading through the recession with only minimal damage. The key is picking the right companies now and having the nerve to stick with them through what unfortunately promises to be a moribund 2009.
Fund manager Mr Mumford, who started his smaller companies fund in the teeth of the 1987 stock market crash, has seen it all before and is quite unfazed: "The good, the bad and the ugly have been selling. There is pretty good value in the market but you have to live through it. The big caps will recover first, followed by the small caps. I don't feel too depressed, at the end of the day we will come out of these problems."
