11th December 2023

Quilter Cheviot: AIM – reasons to be optimistic

The UK small-cap sector has been hit particularly hard in recent years by a combination of macroeconomic factors and seemingly increasingly pessimistic views on the prospect of conducting business here. However, there are several reasons for optimism among investors and, as Albert Einstein said, in the middle of difficulty lies opportunity.

Rising interest rates in response to the return of high inflation has been the chief cause of weakness in the small-cap sector, specifically the AIM (Alternative Investment Market). Many companies we own have net cash and higher interest rates mean that future cash flows are assigned a lower value in a discounted cash flow model.

Smaller firms are often left more exposed to restrictive monetary policies than their large-cap peers and tend to underperform in unstable environments. There are many ways that instability can adversely impact smaller businesses to a greater degree - rising wages, typically a larger share of floating-rate debt, smaller cash buffers to ride out slower periods, and so on.

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Investment Commentary, Investments