AIM stocks, elections and what to expect on December 12th

by Andrew Hore from interactive investor |

Our award-winning AIM writer investigates how the AIM market has performed at general election time.

The AIM indices have risen since the 12 December General Election was announced, but it appears more of a recovery after previous poor performance rather than related to the election. This is the seventh general election since AIM was launched and the first one not to be held in May or June.  

It is also the first general election held in December since 1923 and Parliament is set to meet on 17 December. The outcome will affect how AIM shares perform next year. 

The uncertainty surrounding any election is going to give consumers the jitters. It might spark buying of some goods if there were expectations that the price will rise, but it is more likely that purchases will be put off. 

Motor dealer Cambria Automobiles chief executive Mark Lavery believes that car sales are likely to be sluggish both this month and in December, because of the election. It is not surprising that consumers are likely to put off that type of expenditure. These are not months that tend to be busy, because they are outside of the number plate changes, and it could be that purchases are deferred for a couple of months. 

Corporate investment could also be put off until the outlook is clearer, hampering the performance of suppliers of capital equipment and software. It can be argued that this has been happening anyway because of the Brexit uncertainty, so it won't get any worse.

There is also a period of planning inspectorate purdah until after the election and, for example, this is delaying the decision of the Wressle development public inquiry, which Egdon Resources (LSE:EDR), Europa Oil & Gas (LSE:EOG) and Union Jack Oil (LSE:UJO) are awaiting. This is separate to any ban on fracking. 

One company that will benefit from the General Election being called is public sector and engineering software and services provider IDOX. Considering its problems the company has had over the past couple of years it will probably be a welcome boost, albeit modest compared to the size of the whole group. 

In the year to October 2017, election-related revenues were £4.7 million. That was down on the £5.6 million generated in the previous year, which benefited from the EU referendum and Scottish elections. The 2015 election generated £2.6 million in 2014-15. 

IDOX (LSE:IDOX) has been adding local authorities to its election customer base. During last summer's EU election IDOX provided services to more than 100 local authorities, which covered more than 12 million electors. IDOX printed election documents, verified postal ballots and trained polling staff. 

It is difficult to see any real patterns in the in the AIM share price movements in the past six weeks. The market has recovered but the general uncertainty remains.

AIM election performance

The FTSE AIM All Share index has been calculated back to the beginning of AIM, even though it has only been properly up and running for less than 20 years. That means that the figures cover a period of six general elections.

At the time of the first of those general elections, in May 1997, AIM was still less than two years old. The AIM monthly statistics archive does not go back that far, but at the end of 1997 there were 308 companies with a total value of £5.66 billion. That is similar to the combined current market values of Boohoo (LSE:BOO) and ASOS (LSE:ASC)

The small size of AIM at the time, and the fact that the index was calculated at a later date, may make it less reliable as a measure.

One of the striking things about the performance of AIM is how much of a contrast it is to the performance of the FTSE 100 index. Even if they move in the same direction there is a large gap in the relative performance of AIM. 

The FTSE 100 outperformed in the initial three elections, when the outcomes were no surprise, but AIM outperformed in the more recent three elections. These became less predictable as the campaigns progressed.

In part, these performances partly reflect the performance in previous years. In each year when the last three elections were held, AIM significantly outperformed the FTSE 100. In 2010, for example, that reflects the slower recovery of AIM shares after the 2007-08 global financial crisis. 

AIM has risen between the start of the year and the announcement of a general election each time, except in 2001 when it was continuing to head lower following the internet and technology boom that had pushed the junior market to unprecedented levels. This does not mean that AIM rose over each individual year, though.

The AIM All Share index has risen this year, although it was not much higher just before the election was called.

The day after

When it comes to the day after the election, there is rarely a major move in the performance of AIM. In contrast, the FTSE 100 has on occasion moved sharply in the immediate post-election period. That in part reflects the fact that the larger company share prices react to news faster than smaller company ones, particularly as they are more liquid. 

The one election when both AIM and the FTSE 100 moved significantly on the day after the election was in 2010. This move reflects the uncertainty of the outcome. Even the 2017 post-election movement was not as significant, presumably because there was the expectation that the Conservative government would stay in power. 

In 2010, the AIM All Share continued to fall until reaching a low of 648.47 on 1 July. That was a 7.5% decline from the figure on the day of the election. However, the coalition deal was announced on 13 May and, prior to the deal, there was a bounce back by AIM. It was after the deal was announced that there was a downward trend in the performance of AIM.

In contrast, there was a 2017 post-election decline of 2.5% up until 14 July. After that, the upward trend started at the beginning of the year continued. The deal with the DUP was reached on 26 June, nearly three weeks after the vote. 

In fact, the AIM All Share was lower when the General Election announcement was made in April than it was in the middle of July. That may reflect the initial surge when it appeared that the Conservatives would obtain a significant majority. 

Whatever the opinion polls currently say, it is the races in individual seats that are likely to matterg not necessarily the overall number of votes. That means that, although the Conservatives have a lead at the moment, it does not mean that they will achieve a majority – and there is still nearly three weeks to go.

Opinion polls are only an indication of the outcome of the voting, but they do provide indications for investors. Tactical voting and pacts between parties complicates matters. 

A concern is that the potential for continued uncertainty about when/how/whether the UK will leave the EU could lead to a fall immediately post-election, as in 2010 when AIM fell by 2.4% on the day after the election. Another hung parliament could lead to a similar reaction.

A Conservative majority would probably, at least initially, be welcomed by the stock market. The EU deal would still have to get through Parliament, and then there is the trade deal to negotiate with the EU. That is not going to be an easy task and the trade deal has to be ratified by the individual EU countries. 

A Labour win would be more likely to hit the larger companies, particularly those at threat of nationalisation and that could lead to a sharp fall in the FTSE 100. Other parties have ruled out joining with Labour to form a government, but they might change their minds if they are offered the chance to obtain what they want, like a Scottish independence vote for the SNP.

That suggests that even with a firm outcome there will be continued uncertainty for the stock market in general, not just AIM. However, there are always individual opportunities that are not dependent on what is happening politically or may even benefit from it. 

Next week I will look at the main parties' manifestos and how they might affect AIM companies. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

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