Seven small cap winners to ride the AIM market recovery

Many investors believe that even after a rally of 66% in 2009, the AIM sector still has plenty of mileage.

The Alternative Investment Market (AIM) staged an impressive recovery in 2009 after a disastrous 2008 when investors stampeded to the exit as liquidity fears struck.

After a 62% fall in 2008, a number of commentators said the market was effectively over as a serious entity but a rise of 66% in 2009 meant it significantly outperformed the FTSE All-Share’s 25% rise over the same period.

In the year to date, AIM is up by roughly another 5%, while the FTSE is down by a similar amount, but can the recovery be sustained and if so, which are the stocks likely to outperform?

Appetite for risk

Collins Stewart Wealth Management’s Sean O’Flanagan, manager of the CSWM Inheritance Tax Mitigation Service, is optimistic that the index still has some way to go before it reaches its most recent high of July 2007.

‘One of the reasons it performed so well last year is because it had such a difficult year in 2008. It is still down 50% from its recent highs,’ he said.

O’Flanagan says the return of investor appetite for risk last year was a significant factor in AIM’s rise.

Smaller companies generally have a higher level of operational gearing, he says, allowing them to maximise returns from rising markets. ‘In 2007/08 we saw indiscriminate selling because emotion replaced all fundamentals, but by 2009, investors wanted exposure to riskier assets again.’

O’Flanagan is encouraged by the return to merger and acquisition activity in AIM, especially in the last quarter of 2009, when 23 companies were acquired. ‘In most of these cases, it was cash rather than paper, and it was trade rather than financial buyers.’