Market Wrap: Market bottom? (Friday 27 May, 2022)

Welcome to this week’s Market Wrap. It’s been a quiet week and a generally quiet month for equities – which comes as a relief from some of the wild steps down we’ve suffered recently. News on Friday that US inflation was slightly lower in April than March (4.9% versus 5.2%) was in line with expectations but nonetheless gave more impetus to headlines pondering whether the recent sell off is starting to ease.

Index changes

Source: Stockopedia, London Stock Exchange

Financial headlines

Friday’s US inflation figures naturally pushed stocks higher. On the UK side of the pond the closely watched and heavily US tech-led Scottish Mortgage Investment Trust (LON:SMT) finished the day up 6.7%. Scottish Mortgage is one of the UK market’s largest trusts, helped in part by huge gains from a conviction bet on Tesla (NSQ:TSLA) over several years. That stake was slashed in early 2021, but the Baillie Gifford trust remains an intriguing barometer of sentiment towards US large-cap tech. As you can see, it’s been a bit of a rollercoaster of late…

Elsewhere, this tweet from Dylan Grice caught my eye…

Dylan is a widely respected strategist who runs his own fund firm, Calderwood Capital. Among previous roles he worked with Albert Edwards in the very quant-focused global strategy team at Societe Generale. His comment in that tweet captures a sense that while the recent sell off has been hard on investors, it could all amount to just noise in the long run. Grasping at 10%, 20%, 25% drawdowns as some sort of cast-iron evidence that we’re in a bear market may not, in time, reflect the true feelings of investors. Indeed, the market seems to be looking for reasons to be happy… so we’re not quite in the desperation and panic phases just yet.

And with that in mind… has the Alternative Investment Market (AIM) bottomed out?

Well obviously it is far too early to say. From a technical perspective, it’s just too soon to know if this week’s flat performance is the bottom or just a breather before more bad news. But after months of downward pressure, there’s at least a sense the market might perhaps stabilise from here.

AIM, of course, is a favourite for tax-efficient investing in go-go growth stocks, especially with private investors. It’s come a long way since the financial crisis, and rebounded well from sell-offs after Brexit and Covid.

But this year’s punchy inflation moves have catalysed a shift from growth to value and small to big – and AIM has been on the wrong end of that trend. Even its biggest and best quality stocks have been caught up in the turmoil.

That said, there was a classic small-cap story this week that was a reminder of just why smaller AIM companies attract so much attention.

Shares in the medical diagnostics business Angle (LON:AGL) soared by 58% on Wednesday afternoon, taking its price from 98.5p to 156p. News that the United States Food and Drug Administration had approved the firm’s Parsortix cancer biopsy system was a “major validation”, the firm said.

AIM has always been packed with speculative story stocks like Angle. As a loss-making biotech developer (and there are many of them), it’s supported only by institutional investors prepared to buy the story. Last year’s £20 million fund raising was just the latest example.

Companies like this generally rank badly against Stockopedia’s Quality and Value Ranks – currently standing at 15/100 and 1/100 respectively. The reason for those low ranking scores is plain. When you look at the profile of winning stocks historically, minimal revenues, high cash burn and regular share issuances generally don’t count among them.

Speculative lottery ticket stocks like this usually lose investors money. Their news flow is almost always eye-catching but they are notoriously hard to predict and rarely pay off – but when they do, they pay off in a big way.

Angle investors will be rightly feeling very happy with events of this week. With a market cap now of £352 million, it’s scraped into the top 100 shares on AIM in terms of market cap size. But the risks remain…

With such strong momentum in the stock (currently ranking at 87/100 by Stockopedia), there are now even more speculative investors in it. This could be dangerous Momentum Trap territory. Angle’s investors need this story to develop quickly – because the price strength may not stay for long without quality earnings or appealing valuation to support it.

Final thought

For more bear market therapy you could do worse than catch up with Joe Wiggins’ post on Behavioural Investment this week: What We Should Remember About Bear Markets. As he says… “Everyone has an investment plan until they experience a bear market.”

Have a great weekend.

Stockopedia