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Choppy waters?

• FROM: July 2006 |
• TAGS: saffery champness corporate finance |
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• Choppy waters?
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Is the current uncertainty in the worldwide equity markets a portent of wider things to come? CHARLES SIMPSON of Saffery Champness Corporate Finance looks at current conditions in the context of AIM…

The recent volatility in worldwide equity markets has not left AIM unaffected. In particular the growing number and size of mining and exploration companies, the victims of much of the market movement, increases the impact of general conditions on the AIM market.

All AIM advisers are watching the situation carefully and with great interest. Turbulent conditions in May and June have played a role in restricting the flow of companies to AIM – as of mid-June, a total of 101 companies were admitted to the market in the second quarter of the year, compared to 147 in the corresponding period in 2005.

Will the flow of companies to AIM continue to decline? For a period, it seems likely that this may be the case. Indeed, several admissions have been delayed in the past month as a result of current uncertainty. Timing is, after all, a key component of any successful admission. All stock markets are cyclical in nature - the appetite of institutional investors drives the pricing of shares and sometimes it is better to wait in order to get the best valuation on admission.

In uncertain market conditions, investors also are more inclined to place their faith in companies with solid trading histories and track records of profits and demonstrable revenue streams. Early-stage companies, in particular, often struggle to attract funding in this sort of market.

On a more positive note, despite recent setbacks other factors indicate that current conditions reflect a market correction in the context of a long-running bull market, rather than the start of a bear market. Firstly, with markets having been on an
upward trend for the past three and a half years, a correction of some sort was probably overdue, and was anticipated in a number of quarters. It also occurred in the month of May, which is a traditionally a weak month according to the investor mantra of, “sell in May and go away”. And in addition, despite the number of new AIM issues slowing, the average size of company coming to market continues its seemingly inexorable rise upwards.

It is also heartening that general M&A activity in Europe continues apace, undoubtedly fuelled by the availability of cheap debt. This continues to be a positive factor, as transactional activity and the speculation that usually accompanies it
are both important in helping inflate the share prices of targets and contribute hugely to the general health of all stock markets.

Finally, as advisers, corrections cause all of us to take stock and re-evaluate the new issues with which we are involved. For investors, they also act as a timely reminder of the risks involved in stock market investing.

CHARLES SIMPSON heads up Saffery Champness Corporate Finance, which works in all areas of corporate finance. For more information visit: www.saffery.com

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