News of the two-week ceasefire in hostilities between Iran and the US and the planned opening of the Strait of Hormuz has seen the oil price fall below $95 a barrel and stocks surge.
Having weathered a torrid quarter, UK small caps and AIM shares have bounced strongly with some big early gains from many.
Notable beneficiaries of the change in rhetoric and sentiment have been our AIM portfolio holdings dotDigital, everplay, Impax Asset Management, Jet2 and Volex, with the shares of all of these up by more than 6% in early trade.
The nature of relief rallies like this is that small caps generally outperform on the upside, having suffered more previously as investors sought safer havens. As tension eases, money rotates out of defensive positions and back into the riskier, high-growth areas of the market that were unfairly beaten down previously. Small caps typically have a higher Beta, meaning they are more sensitive to market swings. If the market goes up 2%, a high-beta small cap might jump 4% or 5%.
It is all the more pertinent in the current environment, with many of our AIM companies having continued to trade strongly over recent months, yet their share prices have been falling back on general sentiment and fear. The balance sheets of our portfolio companies have never been stronger with plenty of cash on hand.
While the rally is aggressive, it should be emphasised that this is a conditional ceasefire. Small caps are leading now because they are the most “leveraged” to peace. If the two-week window expires without a permanent deal, these same sectors could see these gains evaporate. However, more positively, a permanent deal could be the foundations of a strong performance for UK small caps over the remainder of the year, given the deeply discounted valuations of many of these, reflected in the very high dividend yields.
If you have any questions or would like to speak about the portfolio performance, please contact us on 01923 713890 or email [email protected].
