Small- and mid-cap UK shares may receive a liquidity boost from this month’s budget decision to exempt trades on the London Stock Exchange’s (LSE) Alternative Investment Market (AIM) from stamp duty, but plans to drive greater retail liquidity into the market could have a more lasting impact.
The March budget exemption will wipe the 0.5% stamp duty fee for AIM trades, but Government plans to include AIM shares in individual savings accounts (ISAs), to be consulted upon this year, would send more money into the LSE’s small- to medium-sized enterprise (SME) market, experts believe.
“This stamp duty exemption is welcome, but a more exciting prospect would be the inclusion of AIM shares in ISAs, which could considerably widen the universe of companies that can be held within a tax efficient structure,” said Laurence Marsh, head of research for UK market maker Winterflood. He added that greater AIM liquidity could drive a return to equities that went into bonds in the wake of Lehman’s 2008 collapse.
The AIM market was created in 1995 to support greater investment in SMEs, which are seen as key element of the UK economy, and a large source of employment. The AIM market has less-stringent regulatory requirements for listed firms and offers tax advantages for company owners.
Despite the expected upturn in liquidity, some believe the incremental benefit from the exemption will not alter the higher risk and lower liquidity that characterise the AIM market.
“Removing stamp duty is not significant enough to inform longer term investment decisions, which are based on due diligence and evaluating a company’s business model,” said James Thorne, a UK smaller company fund manager for buy-side firm Threadneedle.
Thorne cites recent Threadneedle analysis comparing spreads between AIM shares and those on LSE’s main market. The average bid/offer spread for the largest 700 securities (representing 95% of the AIM market) was 265 basis points, compared to 6.3bps for FTSE100 stocks.
“The AIM market has historically been inefficient in deciding the value of its listings, and many investors and advisors have over-valued companies based on potential growth which has not occurred,” Thorne said.
Marcus Stuttard, head of UK equity primary markets for the LSE foresees short-term liquidity gains, but agrees more has to done to stimulate investment in SMEs.
“We hope this will have a significant long-term impact as investors have more reason to support high-growth SMEs,” Stuttard said. “The FSA’s Conduct of Business Rules can lead brokers and compliance officers to unfairly deem all SMEs as high-risk, limiting the attractiveness of AIM for investors. This should be corrected so investors have the opportunity to invest in small and growing businesses.”
In February, the LSE announced it would launch a portion of its main market for high growth for companies deciding between listing on the LSE’s AIM market or main market.
The High Growth Segment lets firms float 10%, rather than the usual 25%, of stock on the market if they can prove a compound annul growth rate of 20% over three years.