AIM shares touched by the 'Trump effect'

The initial fall in the markets after Donald Trump won the US presidential election was clawed back even faster than the UK market decline after the EU referendum. That does not mean that investors are comfortable with prospects for the world economy. There is still enormous uncertainty.

Some AIM companies that have been benefiting from the fall in the pound against the dollar will lose some of that benefit if the dollar continues to weaken. This could be made worse by changes in some areas of US policy, such as healthcare.

Plans to cut taxes and increase spending on infrastructure appear to suggest that US debt, already worryingly high, will rise further. There is also the uncertainty of what will happen to trade deals in force at the moment - and ones that are being negotiated.

The second half may be weaker for the US firms because of the swing back in  exchange ratesAIM has US-based companies and other businesses with significant exposure to the US.

In fact, research by US smaller company advisory firm AIM Advisers Inc indicates that US companies quoted on AIM outperformed AIM as a whole in the first half of 2016.

The effect appears to be partly down to size, because it is particularly noticeable when the performances are weighted by market capitalisation as they are in a standard index, such as the FTSE AIM All-Share index. However, the unweighted performance of the US domiciled companies is better than the unweighted performance of non-US holding companies.

That research is based on 49 US-based companies quoted on AIM. Of these, 13 were domiciled in the US and 36 were foreign domiciled. The figures cover the first six months of 2016 and average market capitalisations were used.

Spending $1 trillion (£793 billion) on infrastructure could provide longer-term opportunitiesThe overall return of all the US companies, wherever they are domiciled, is 1%, although this rises to 20% when weighted for market capitalisation.

When the weighted performance is factored in, there is a 29% increase for the foreign domiciled US-based companies. That compares to the 2% fall in the US domiciled companies and the FTSE All-Share index decline of 4% during the period.

Exchange rates may have been a factor, so the second half may not be as strong for the US companies because of the swing back in the dollar/pound exchange rate.

Plans to spend up to $1 trillion (£793 billion) on US infrastructure could provide longer-term opportunities for some AIM companies. There is not a lot of exposure on AIM to this theme, but there is some.

Somero

Somero Enterprises Inc, which won the international AIM company of the year award for 2016, is an example of a US domiciled company that has performed strongly this year, and there could be additional opportunities from planned increases in US infrastructure spending.

This geographical diversification is a positive because not all countries are growing at one timeThe concrete levelling equipment manufacturer will not benefit from the investment in roads and bridges, but there is talk of airport investment and there could be other spending on buildings that would require construction firms to buy more machines.

North America is already a strong market, contributing three-quarters of revenues, and it is possible that some of the positive effects could be offset by the geographical spread of the rest of the business.

This geographical diversification is a positive because not all countries are growing at any one time. China is a growing market, but if a Trump presidency tears up trade agreements, then that could hit non-US sales.

ClearStar

If the infrastructure spending and other measures do produce more jobs that could be good news for ClearStar Inc, which provides employment screening services - particularly considering the poor performance of the company and the share price since it floated.

ClearStar provides background checks and drug testing for companies when they plan to appoint an individual. These checks are required to comply with state and federal regulations and can be adapted to the needs of individual businesses.

Craneware

Healthcare is an area where AIM companies could be affected. The Affordable Care Act, or Obamacare as it is also known, could be revoked and there may be plans to reduce the costs of drugs.

The Affordable Care Act has led to an increase in demand for hospital time and that demand is likely to fall back. US hospital group share prices fell sharply after the result of the election was known.

Craneware supplies US hospitals with software that ensures that they calculate and charge appropriate fees.

The main concern for Craneware could be new businessThe potential ditching of the Affordable Care Act could have a knock-on effect, but Craneware is cushioned by long-term contracts and the fact that hospitals will need to continue to make sure that they generate the revenues they are entitled to - especially if demand reduces.

The main concern for Craneware could be new business. It has been successful in winning new business up until now, but hospitals may be cautious about future investment until it is clear what will happen.

That could curtail Craneware's rate of growth, which is not good news for a company on a premium rating. The underlying business remains a good one, though.

Vernalis and Sinclair Pharma

Drug suppliers could be hit by law changes and tougher action on the prices of drugs. Vernalis has launched cold cough treatment Tuzistra in the US and this is an important part of the drug company's growth strategy.

It is still building up sales of this prescribed medicine, which is eligible for co-payments where the individual only has to pay a small initial amount for the prescription with the rest covered.

In contrast, Sinclair Pharma is trying to break in to the US aesthetics market. The minimally invasive treatments will be paid for directly by the person having the treatment and there is less price sensitivity.

Caledonia Mining

Gold obsessives are going to be out in force over the coming months. The election result was a catalyst for gold going back above $1,300/ounce, although it subsequently fell back. However, while uncertainty continues it could go higher.

The gold price is still more than one-fifth higher than at the beginning of 2016, but it is well below the peak of more than $1,900/ounce back in 2011.

There are a small number of AIM gold miners that are generating profit and dividends, including Caledonia Mining Corporation.

Orosur Mining

Gold producer Orosur Mining Inc does not pay a dividend, but it has cut its operating costs and would be a major beneficiary of a rise in the gold price due to its operational gearing. A lot of work has gone into getting the Uruguay-focused company into a better financial position following a period of losses.

Orosur reduced its cash operating costs to $693/ounce in the three months to August 2016, which is well below the figure of $954/ounce in the corresponding period in the previous financial year. Admittedly, this cost reduction was helped by the mining of higher grades and operating costs will rise in the second quarter.

The rise in the gold price may also be good news for explorers with expensive projects onThe price received for gold sold in the quarter was higher, but year-on-year production fell from 12,471 ounces to 9,950 ounces and revenues fell from $14.5 million to $12.7 million.

Even so, Orosur moved from a loss to a profit of $2.76 million and there was a $4.8 million cash inflow from operations.

Net cash was $4.7 million at the end of August 2016. Orosur expects to produce between 35,000 and 40,000 ounces of gold and cash operating costs are expected to be between $800/ounce and $900/ounce.

The rise in the gold price may also be good news for explorers with projects that have relatively expensive projected operating costs.

The bad news is that lots of these small, hardly solvent explorers will think that this is a good time to tap up shareholders for cash to finance their operations for a few more months, hoping that one day a commercial mine might be developed.

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.