From MoneyWeek · · 2m
UK small caps face profit potential
UK small caps offer profit potential despite market struggles.
In brief
UK small caps offer profit potential despite market struggles. UK small caps show profit potential as investors seek undervalued opportunities amid tax changes and market volatility. Originally reported by MoneyWeek.
Aim market struggles
Aim, London Stock Exchange's market for smaller or growing companies, faces negative sentiment and tax reforms reducing attractiveness.
Aim index performance
FTSE Aim 100 index stands at 3,650 compared to peak of 6,550 in September 2021.
Aim returns decline
Aim returns over ten years near zero versus 60% gain from FTSE All-Share index.
Fewer companies list on Aim
Companies listing on Aim dropped from 1,700 in 2007 to barely 600 today.
Aim bull perspective
Alex Game, Liontrust fund manager, remains an Aim bull citing high founder ownership and quality businesses.
“I remain an Aim bull”
Diversification angle
Eustace Santa Barbara highlights diversification benefits of holding Aim stocks over mega-cap companies.
“There's also a diversification angle”
Macroeconomic pressures
UK faces elevated inflation, depressed demand and political instability affecting smaller companies.
Interest rate impact
Rising interest rates discourage growth stocks as investors seek higher returns.
Capital flight from Aim
Hargreaves Lansdown analysis shows £6.1 billion withdrawn from UK small caps funds.
Business Property Relief change
Business Property Relief tax incentive reduced from 100% to 50% since April 2024.
Inheritance tax impact
Inheritance tax on Aim shares now applies at 20% instead of 40% after BPR reduction.
Investor reactions
Tax Efficient Review reports £170 million sold in Aim shares this year.
Aim listing challenges
Fewer exciting new businesses entering Aim market due to alternative funding sources.
Corporate governance issues
Aim has governance failures and criminality scandals despite light-touch rules.
Market cyclical nature
Aim has historically bounced back from market lows after difficult periods.
“Aim does go through these spells and right now we're at the nadir of the market”
Aim's growth potential
Aim stocks show attractive valuations with low price/earnings ratios.
Private equity activity
Private equity acquiring Aim companies suggests undervalued opportunities.
Potential catalysts
Lower interest rates and new IPOs could boost Aim market sentiment.
LSE reforms
LSE plans to reduce listing costs and ease capital raising on Aim.
Stock-pickers' market
Aim is an active stock-pickers' market with high return potential.
What to remember
UK small caps show profit potential as investors seek undervalued opportunities amid tax changes and market volatility.
