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Treasury's aim is to stimulate the UK junior market, but will the plan work?April 01 2013, 1:00pm
The market’s growth stocks will be given a boost by two government initiatives – one put out to consultation before last week’s Budget and the other unveiled during the Chancellor’s speech.
The abolition of stamp duty on shares traded on the London’s junior bourses will occur in April 2014, Chancellor George Osborne said, while equities quoted on AIM are to become eligible for stocks and shares ISAs once plans are formally adopted.
A de-facto ban on boosting your tax-sheltered investment portfolio with UK growth stocks has always seemed more than a little perverse.
Remember, only shares from recognised exchanges are currently deemed suitable for inclusion in ISAs, and AIM doesn’t fit that description.
The original idea was to protect the less sophisticated and financially literate investors from the riskier shares traded on the junior market – a laudable goal.
However, AIM stocks are allowed in SIPPS. And critics say the current framework becomes wholly untenable when you take a close look at what the Treasury considers an eligible exchange for ISA purposes.
So, you can add stocks from the lightly-policed Malta, Colombo and Cayman Island stock exchanges to your individual savings account but not equities from UK’s alternative market.
The contradictions become even more apparent when you realise AIM shares that also trade on recognised bourses such as the Australia’s ASX and the Toronto exchange instantly become ISA-eligible by dint of that dual listing.
Don’t think for one moment this rule change will have a monumental change in the savings industry as only 16% of the ISA market is stocks and shares driven.
It does, however, open a whole world of choice to investors who use stocks and shares ISAs to protect their income and capital gains from the taxman.
Currently there are 1,318 UK equities eligible for ISA inclusion, but that figure will rise by 1,096 once AIM stocks join the fold.
Of course AIM shares already receive preferential tax treatment as in most cases they are not subject to inheritance tax. That is, provided the shareholder has held them for at least two years before death.
“This paves the way for an inheritance tax-free ISA,” Danny Cox, of the investment firm Hargreaves Lansdown, points out.
Both the changes to ISA eligibility and the abolition of stamp duty are designed to help small and high growth companies access "affordable long term financing".
In layman’s terms the moves are designed to stimulate trading volumes, which then makes it easier for companies to raise new funds.
London Stock Exchange data on AIM reveals why these measures may be needed, showing that annual turnover has been stuck in a rut between £32bn and £38bn since 2009.
This is roughly half the figure achieved in 2007, and sharply down on the years immediately preceding and after this all-time high.
Things are picking up, with three companies joining AIM this week and a further six slated to sign-up between now and April 8.
However, there are still periodic droughts in liquidity that coincide with major market-moving events such as Cyprus earlier this week and the Eurozone crisis last year.
The professional traders call it taking risk off the table and the net effect is tens of millions of pounds are siphoned out of the smaller markets to be held in cash or diverted into safer investments.
The upshot is AIM stocks just aren’t as popular as they used to be. So Osborne’s plan to stimulate demand will be welcomed.
However, the initiative may not provide the elegant solution it proposes, according to one industry professional.
“It is worth pointing out that not all of the benefit would flow to UK smaller companies starved of financing, which is part of the Government’s rationale,” said Jason Hollands, of the wealth management group Bestinvest.
“There are some larger business listed on exchanges such as AIM and around 40% of AIM companies – representing half of its market cap – are either incorporated overseas or operate outside of the UK.”
Finally, give thought to the perils of investing on AIM: it is challenging on the best of days and downright toxic on the worst.
That said, not all AIM stocks are alike. The AIM 100 index contains a number of big dividend payers, several that are over the £1bn mark and one firm, the online retailer ASOS, is big enough to challenge for a berth in FTSE 100 proper.
In fact, there are plenty of established, profitable and cash generative groups on AIM offering an alternative to the binary bet miners, junior oil explorers and biotech firms that seem to obsess the get-rich-quick brigade.
Ten Most Popular AIM Stocks With Savers
Baobab Resources £66m
Gulf Keystone Petroleum £1.6bn
Nanoco Group £350m
Quindell Portfolio £398m
Range Resources £97m
Sirius Minerals £306m
Xcite Energy £438m
Source: Hargreaves Lansdown