The coronavirus pandemic has had a lasting effect on businesses, with many having to slash revenue forecasts, make redundancies or cut dividends to keep their heads above water.
This has made things tough for investors, particularly those seeking income from their portfolio. For those that were willing to accept more risk, however, Aim-listed stocks have proved to be the pandemic underdog.
Since the end of March 2020 to the end of June 2021, the Aim 100 index rebounded 76.6%, compared with the FTSE 100 at 28.8%, according to data from the Wealth Club.
“The Aim market is a compelling destination for fast-growing businesses seeking to raise capital,” says Wealth Club CEO Alex Davies. “In the first six months of 2021, Aim companies raised £4bn, more than during the whole of 2019, and up 37% on the same period last year.”
He adds that Aim companies are highly investable and include popular names such as online fast fashion retailers, boohoo and Asos, and premium drink mixers firm, Fever Tree.
“As many as 68 companies currently in Aim are worth over £500m, spanning a diverse range of industries such as software, industrials and pharmaceuticals,” he explains. “As we come out of the other side of the Covid crisis, the revenue and jobs created by Aim will be crucial to the recovery. It should also provide investors with some exciting opportunities.”
Pandemic resilience
Investor dividends were one of the casualties of the pandemic, with businesses of all sizes opting to slash or halt payments to shore up their finances.
According to Link Group data, between April 2020 and March 2021, the first four quarters of the pandemic, Aim payouts fell 40.4%, slightly better than the 41.6% decline on the main market, the data shows, and while Aim dividends fell back to a level last seen in 2016, wider market payouts declined to 2011 levels.
“Aim companies are more vulnerable to economic disruption than their multi-national counterparts. They are less diversified and have more limited access to funding so they must move quickly to preserve cash to ensure they can ride out a brewing storm,” says Link Group, managing director of corporate markets, EMEA, Ian Stokes. “The pandemic has certainly been stormy, but despite the worst recession in two centuries, Aim companies have come through in good shape. They have been eager to restart dividends and the recovery has been blisteringly fast so far.”
The dividend recovery started to gain traction in the second quarter of 2021 when cyclical-sensitive sectors such as industrials, property and building materials, led the rebound in higher dividend payments.
Excluding one-off special dividends, underlying dividends during the second quarter of 2021 rose 56.6% to £265m and headline growth for the first half of the year was 40.7%, with Aim dividends more than twice as strong as the main market.
“Even though relatively few Aim companies habitually pay dividends, those that do tend to grow them faster than the main market. We are confident Aim’s dividends can regain their previous highs by some time in 2023, almost two years sooner than our expectation for the main market,” adds Stokes.
More to come from cyclicals?
Cyclical stocks have outpaced their growth counterparts for much of the past 18 months, benefitting from the strong post-pandemic economic recovery and dramatic reflationary trade.
However, for Banque Syz head of discretionary portfolio management Luc Filip (pictured), there is a question as to whether the slowing growth engine is enough to sustain gains among cyclical names.
“In this transition phase, we expect economically sensitive stocks to lose their lustre, while companies with strong balance sheets and solid earnings to again move into the ascendancy,” he says. “Meanwhile, we are seeing signs fixed income, which has been an area of negative yields, is beginning to offer more promising investment opportunities.”
Filip argues that now is the time to take profits on cyclicals that were built into portfolios during 2020 because of the slowing economic growth and US monetary policy normalisation, which he says will create a less favourable environment for companies in that space.
“The magnitude of the shock, and the uncertainties around its impact on the economic outlook, has meant financial markets have oscillated between despair and hope, with occasional spikes in both directions,” he says. “Europe’s summer marks another step in this atypical economic cycle with a transition from recovery to an environment of steadier growth.
“Solid earnings growth remains a strong catalyst for equity markets. But, as economic conditions gradually normalise, companies with good balance sheets and visibility on their earnings prospects are likely to regain their leadership positions, at the expense of cyclical sectors that have most benefited from the recovery.”
