The first half of 2022 has been the worst six-month period for AIM since the 2008-09 financial crisis. Amidst that storm, our portfolios held up about 7% better than the wider market (see overleaf). Losing less when markets turn sour is key to long-term value creation—though we appreciate that your valuation will make for uncomfortable reading regardless.
Our core message this quarter is that there is a growing disparity between that dark market mood and news from corporates at the economic coalface. Investors seem to expect a severe and deep recession, caused by sharply rising interest rates to tackle an inflation spiral that is running out of control. Corporates, meanwhile, see strong demand, record order books, and plenty of opportunity for growth. Those too divergent economic outlooks cannot both be right.
It is now commonplace to find shares with dividend yields in excess of their P/E ratios, or share prices that discount zero growth for businesses that are clearly growing rapidly. We do not get the impression that corporates are being excessively optimistic. We have seen a series of upgrades to profit expectations this quarter with businesses clearly running ahead of cautious budgets. Higher profits and lower share prices mean valuations now look very attractive.
We are not the only ones seeing value. Private equity firms, too, are out buying. This quarter Ideagen—a stock we highlighted in the Q4 2021 Company Focus—was the target of a bid. In many ways this is regrettable: Ideagen is a top-rate business that we would have liked to own for a lot longer. With some of the proceeds we started a new position in Inspiration Healthcare—a business operating in a crucial and defensive market (see Company Focus). This is the kind of stock we like a lot: high quality, IP-rich businesses at a good price—and that fly under the reach of larger institutions.
In addition to stocks being taken out entirely, this quarter also saw Oxford Metrics—a long-standing holding—sell a subsidiary that contributed 15% of the group’s profits for over £50 million, equivalent to half of the group’s value at the time. Again, this demonstrates the inherent value in these companies that is not being recognised.
We have no crystal ball and no way of knowing how long this market storm will last. But we can say that there are some wonderful businesses, trading well, and currently on sale. For the long-term investor, opportunity abounds.
You can read the rest of the AIM Service Q2 2022 Investors’ Report here.
