Why resurgent AIM could keep rising

AIM's strong performance in the past year has been fuelled by rises in the largest companies on the junior market. The FTSE AIM All-Share index has almost reached its peak from three years ago, while the FTSE AIM 100 index has already outstripped the level three years ago and is back to where it was five years ago.

The share price rises have been backed up by higher trading levels as well. In each of the last six months of last year, the average daily value of trading and the average number of trades each day were higher than the corresponding period in the previous year. This followed a first half to the year where trading levels had been lower.

Even though the first-half was weak, the average daily bargains for 2016 still managed to reach 24,593, up from 22,809 for 2015. This was the second-highest average in the history of AIM - the high was 26,585 for 2014.

AIM reached its low for last year on 11 February, but fell nearly that far after the Brexit voteThe average daily value of trades rose from £121.9 million in 2015 to £128.4 million in 2016, but this is still much lower than past levels - in the past 12 years only 2013 had a lower average daily value. This means that the average size of each trade has fallen, suggesting that the activity was from private investors.

There are fewer companies on AIM than there have been since early 2004, but the total AIM market value of £80.8 billion at the end of 2016 is the highest at the end of a year since 2007. It is also the third-highest year end market value.

AIM reached its low for last year on 11 February, although after the EU referendum result it fell back to just above that level. It is noticeable that 77 out of the current constituents of the AIM 100 rose from the low point in February.

Five of the constituents had not floated at that point, so that means that 18 constituents have fallen in value. There are quarterly changes, so not all of these were in the index for the full period. The AIM 100 risers figure compares with around 60% of the AIM All-Share constituents that rose over the period.

If the figures for 27 June are used, then the number is slightly higher for the AIM All-Share, but 92 of the AIM 100 constituents were higher at the end of the year - and one of the others was unchanged.

Best and worst performers

The worst performer since June was last year's AIM award winner for best performing share, Pantheon Resources, which had already risen significantly prior to that point but it has since fallen by 40.4%.

This indicates that not only have the larger companies tended to perform better, but this is even more pronounced since June.

There are not as many large resources, particularly mining, companies as at the start of the decadeThe large number of resources shares in the AIM 100 had held back the performance of the index in more recent years. In 2015, the FTSE AIM 50 index, which has historically been less dominated by resources companies, outperformed the others but last year it performed similarly to the AIM All-Share.

There are not as many large resources, particularly mining, companies as there were at the start of the decade. However, the better performers in the AIM 100 in the past year are mining and oil and gas companies.

The best performer since February in both the AIM All-Share and AIM 100 is SolGold, which is 1,540% higher, helped by a bidding war between potential investors to provide finance for its Cascabel copper project in South America.

Trading in the shares has been relatively modest compared to the company's size and this increase is unlikely to be repeated in the short-term, as the focus will be on progressing the project and potential news will not be as significant as last year's.

Top five performers

The top five performers in the AIM 100 are in the top 28 performers in the AIM All-Share. The next three of the top five after SolGold are oil and gas companies - Ithaca Energy Inc (up 425%), Sound Energy (up 396%) and Hurricane Energy (322%).

The oil price has shown signs of recovery, but positive drilling news has been behind the rise in these shares. North Sea-focused Ithaca is half its peak five years ago and although Sound Energy passed its six year peak last September, its recent all-time high is only slightly ahead of the previous record high in 2005. Hurricane has not been around as long, but it only recently went past the previous high back in July 2014.

North Sea-focused Hurricane appears to still have plenty of upside from its drilling and explorationThe three companies were in the top 20 traded shares in December 2016, with a total trading value of £88 million (from nearly 21,000 trades), up from less than £12 million (from 6,400 trades) in the corresponding month of 2015. There were other months earlier in the year when trading levels were much higher.

North Sea-focused Hurricane appears to still have plenty of upside from its drilling and exploration. Sound Energy, which has just increased its stakes in its main Morocco-based assets, has a strong balance sheet following a £26 million fundraising at 81p a share last November and further potential upside from drilling. Ithaca is looking more fully valued, even though production is likely to rise significantly this year.

Best non-resources share

The best-performing non-resources share is Boohoo.com, which consolidated on its initial recovery from its low at the beginning of 2015 at which point it had more than halved since flotation. Trading last December reached £143.7m (from 28,065 trades), up from less than £20 million (from 6,045 trades) in December 2015.

The online fashion retailer has moved from around 0.6% of AIM's market capitalisation in February to 2% - that is not much less than the total value of the top four performers in the AIM 100.

Because the index is weighted by market capitalisation, this rise will have had a significant effect on the index as a whole. That is also true of fellow online fashion retailer ASOS, which accounts for more than 5% of AIM and doubled in price from February.

There are eight AIM companies valued at £1 billion-plus and four of them have more-than-doubled in value over the period - the other two are Burford Capital and Fevertree Drinks. The other four increased in value. The worst performer of these was Hutchison China Meditech, which rose by 9.9%.

New entrants

AIM flotations remain more limited in number than in the past but the performance of those that have made it has generally been excellent. This is because only the better businesses have been able to float.

Broker Stockdale Securities has published figures for last year's new entrants, excluding readmissions, and the performance was even better than in 2015.

The main difference to previous years was that so few of the share prices of the new entrants fell post-flotation. Stockdale identified 38 new companies, excluding reversals and readmissions, and seven of those fell with the rest making gains.

Ratings of better performers in the AIM 100 appear full, but smaller companies may be better valueThe best-performing new entrant in 2016 was software robotics company Blue Prism, which was 470% ahead at the end of the year. Stockdale says that the average gain is 42%, or 31% excluding Blue Prism. The equivalent gain in 2015 was 21%.

It does not appear that the largest companies performed as well when it comes to the new AIM admissions, though. Three out of the ten largest companies floating ended the year with a lower share price. Most of the best performers had a market capitalisation of less than £50 million.

It may be difficult to repeat the strong performance by AIM last year, although there is no reason to believe that the standard of new admissions should decline.

The ratings of many of the better performers in the AIM 100 appear pretty full, although there tends to be a lag in performance by smaller companies and there seems better value there. Further improvements in commodity prices could also help AIM to make further progress.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.