Market Commentary - Q2 2021
Q2 2021 Market Commentary, by Ivan Sedgwick
Q2 lacked fireworks, and in the smaller company world, AIM more or less tracked the broader UK market again in Q2: the AIM all-share rose 4.2% against the FTSE all-share up 4% and the FTSE 100 up 4.8% (in Q1 it slightly lagged, the comparatives were 3.4%, 5% and 3.9%). It was hard to deduce clear patterns. We saw some good gains from industrial companies emerging from Covid- particularly Pelatro and CyanConnode which depend on Asian demand, and Avingtrans and Solid State in the UK. Two companies with exposure to the Covid testing market, Yourgene and Omega, fell, as the market realised that this is a competitive field – both have other strings to their bows... But we continued to see some good performances elsewhere in life sciences – Renalytix gained another 22%, SkinBioTherapeutics 37%, and Angle 68% (before coming to the market in Q3 for some more cash).
If you are interested in the AIM market you may find more useful commentary in our recent webinar, which can be accessed here.
New issues are a good lead indicator of market sentiment, and although the first half saw as much raised on AIM as in all 2020, June was the weakest month this year for new money raised, and we are starting to see price resistance re-emerge. AIM is structurally lacking in institutional backing even though the institutions that are active in the market have done very well and this does sometimes become evident. We ought to start seeing some of the tides of ESG & Green funds wash into AIM – there are plenty of interesting opportunities – but it will never be an easy market for passive funds and ETFs, which are a large part of institutional demand.
The beginning of the return to more normal working patterns is perhaps removing some of the “gamification” element to equity trading, and the sharp decline in Bitcoin (lack of green credentials and lack of licit use cases – who knew?!) has perhaps also calmed “animal spirits” a little. More generally, the Delta variant, the realisation that we are going to have to live with Covid, and the uncertainty as to what that looks like, are collectively unhelpful, and the widely reported component and labour shortages, from chips to waiting for staff, have dampened the pace of recovery. Government support measures are beginning to run off (e.g. the commercial rates holiday for hospitality in the UK ended in June, albeit it continues at a 66% discount till March next year) so companies are having to work out how they survive on their own.
The debate of the quarter was around inflation. Although in theory, higher rates affect the valuation of highly rated stocks, particularly those with distant profits, if they have pricing power the effect will be muted. So far the central banks seem committed to keeping rates lower for longer, effectively taxing cash savers. Our MTNs are short duration and structurally less vulnerable than low-coupon, long-maturity government and investment-grade paper to rising rates, although of course, they have inherently higher credit risks. For now, with a slow recovery in the UK and Europe, banks still flooding the market with cash, and bond yields back at very low levels, the proponents of the argument that price rises are transitory are in the ascendant, and the markets seem not to be concerned. Risks (for rates) must be on the upside over the medium term, however.
We see no reason to shift our focus areas. There continue to be interesting opportunities in life sciences, away from Covid testing. The digital transformation agenda and the need for heightened cybersecurity were delayed a little by lockdowns but have not gone away. Consumer habits have changed radically. And the need for a green transformation of energy, transport and food production has only become more apparent, creating more interesting investment opportunities