AIM stocks may still be worth a punt in market turmoil but investors need to be choosy, analysts said on Tuesday.
London’s junior market has not escaped a hit as Chinese devaluations and commodity price falls have shocked global markets.
AIM is the second most exposed UK share index to natural resources, with 17.1% of its companies involved in the sector compared to 24% of firms in the FTSE 100 Index. AIM has fallen 7% since the start of August.
Sebastian Jory at Liberum Capital said: “In general, AIM is a very resource-heavy index so it’s not going to be immune from emerging market strife.”
But the diversity of investment options available on AIM, which this year celebrated its 20th anniversary, could offer a solution.
Investors are likely to have to pick well and take a long term view, with little sign of a quick end to the turbulence.
Jory said: “It’s not wrong to own domestically cyclical companies outside the resource sector such as retail or UK tech, diversified financial stocks or house-builders.
“There’s massive breadth in AIM in terms of the type of companies it offers.”
Shore Capital said companies involved in commodities are unlikely to avoid an impact from the Chinese downturn, but Shore mining analyst Yuen Low said some, such as those involved in mass commodities such as iron ore, are set to be more affected than others.
Gold is set to take less of a hit because of its particular dynamics as an investment haven, although it is still vulnerable if Chinese turbulence affects US interest rates.
AIM stocks involved in commodities with wide global demand like fertiliser, such as Sirius Minerals (LON:SXX) and African Potash (LON:AFPO), may have potential.
Or investors could go for companies trying to develop new markets for precious stones such as emeralds and rubies, such as Gemfields (LON:GEM).
Low said: “If you’re going to invest in small-caps you have to do bottom-up analysis and find companies that can survive in the current downturn.”
Close Brothers Asset Management (CBAM) says its strategy has been and remains to target shares with no significant exposure to China manufacturing and emerging market resource demand.
Chief investment officer at Close Brothers Asset Management, Nancy Curtin, said share selection has never been more important.
She said: “We continue to focus on those businesses combining a high level of quality, value and growth that should continue to perform resiliently in the current environment.
“This has led us to be weighted in more domestically-focused shares in the US and UK and select health care, technology and consumer discretionary names in the developed world.”