Now that we’re in the first full week of the new tax year, many investors will be hoping for an end to the grim trading conditions of recent months. Liquidity on AIM has been pretty dire, with share prices languishing, while the main market has suffered its worst quarter since the Financial Crisis. The FTSE100 lost more in Q1 than it did in any other quarter since 2009. However, could spring have now arrived to thaw these wintry climes?
One of the headwinds facing markets over the last month has been decidedly seasonal.
By the time the tax year comes to an end, many investors will have used up their various allowances, leading them to scale back or completely stop trading until the beginning of the next 12-month period. Many will also shift their focus towards getting their financial houses in order to manage their tax liabilities or allowances. For example, trading conditions in 2017 were generally so good a lot of investors made a lot of money. While this was undoubtedly positive, March would have been a month where reality hit home, as these same people woke up to what their potential capital gains tax liabilities might be.
This can have a natural dampening effect on the market, as successful investors scale back or cut losing positions to reduce their tax bills. For AIM the issue can be particularly acute, given the high proportion of retail participation.
And this was not the only tax-related drag on liquidity. For those investors that had used up their ISA allowances for the year, they often wait until the new financial year when the new allowance kicks in. Stock Individual Savings Accounts (or “Stock ISAs”) are a tax-free wrapper, which allows investors to purchase up to £20,000 worth of stock (the current allowance) in a financial year and any future returns do not incur capital gains tax (“CGT”). Retail investors who take advantage of stock ISAs tend to save cash towards the end of the financial year, with a view to starting to invest it at the beginning of the new financial year. This strategy can significantly increase overall returns, if the investor picks good stocks, as CGT is currently 40%.
Then there are other factors to consider, which might have been weighing down on AIM.
Although it is not technically allowed, it is entirely possible that some AIM companies might sit on news in late March/early April, waiting to release it into an environment where deal-hungry investors are far more likely to bite. So far this week there hasn’t been much evidence of that, though there have been some releases which might be a little, how to put this, tardy (we name no names!).
Finally, there is still the ongoing issues surrounding the global stock market correction seen in February and the collapse of AIM brokerage stalwart Beaufort Securities at the beginning of March. While the main markets appear to be consolidating at key levels of technical support, Beaufort’s sudden downfall is likely to continue to have a negative effect on AIM for months to come. Beaufort’s clients still have their assets locked up at the failed broker and there is no indication yet when this will be resolved. This has certainly taken a hefty chunk of liquidity out of the market and the sooner that can be reintroduced the better.
However, with a bit of luck, the coming weeks should mark a change to the recent sluggish mood. The resetting of ISA and CGT allowances should encourage investors return to AIM with a spring in their step. After a very strong 2017, it would be good to see some more trading sessions end with a bang rather than a fizzle in 2018 as news returns to the market.