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Taking Aim at a small-cap success story

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London’s Alternative Investment Market was traditionally a hunting ground for gung-ho private investors, willing to take a punt on thinly traded small-cap stocks that could make — or lose — them a small fortune.

But eight years ago, Aim found a higher purpose. It is now the go-to place if you want to reduce your inheritance tax bill.

This week is the anniversary of reforms ushered in by former chancellor George Osborne making it possible to hold Aim shares within a stocks and shares Isa.

Designed to boost investment in small British companies, the tax-free attractions of Isas were yoked with the IHT loophole of business property relief (BPR). Intended to protect family businesses from ruinous tax bills, this IHT exemption also applies to certain Aim shares if held for over two years.

Of course, BPR was never intended to benefit ageing “Isa millionaires”, but plenty of their heirs will be spared a 40 per cent tax charge when they inherit these portfolios. What’s more, the Isa wrapper means there hasn’t been a penny of capital gains or dividend tax to pay despite the stonking performance of Aim shares in recent years. Thanks, George!

Today, up to half a billion pounds a year is flowing into “IHT Isas” offered by specialist investment management companies such as Octopus, Unicorn and RC Brown, according to estimates by investment service Wealth Club.

This trend has been boosted by the pandemic, as the tax liability of soaring equity valuations collides with fears of diminishing life expectancy.

Line chart of Indices, rebased  showing The Alternative Investment Market outperforms

But IHT fever alone cannot account for the impressive outperformance of the alternative index. Since the pandemic nadir last March, the FTSE Aim 100 index has rebounded 107 per cent — nearly two and half times the recovery achieved by the FTSE 100 over the same period.

Hargreaves Lansdown, the UK’s biggest investment platform, says 2021 is “on track to be the biggest ever year” for Aim trading, as investors buy into the small-cap growth story.

Data from investment brokers show that tech, green energy and life sciences companies are the biggest draw for investors, alongside the commodities stocks with which Aim is more traditionally associated.

When the Isa rules changed in 2014, there were just 18 Aim-listed companies with a market cap of £500m or more (a third were highly speculative mining or oil and gas exploration outfits, cementing Aim’s reputation as a volatile market).

Today, there are 68 stocks that have passed the £500m point — and spanning a range of sectors, they are arguably much more investable.

Online retailers Asos and Boohoo are two of the most-bought Aim shares by Hargreaves Lansdown investors this year, having received a huge sales boost during the pandemic.

Other tech picks lurking just outside the top 10 include GlobalData, which supplies thousands of governments and companies with data analytics, and identity data specialist GB Group, which claims to be able to ID more than half the world’s population. All have greatly increased their earnings in recent years.

“The FTSE 100 is full of yesterday’s companies, but if you invest in Aim you can get exposure to tomorrow’s winners,” says Alex Davies, chief executive of Wealth Club. “It’s the nearest thing we have to a British Nasdaq.”

On rival platform Interactive Investor, the green theme dominates. Hydrogen energy producer ITM Power is its bestselling Aim stock so far this year, with investors betting it will benefit from changing energy requirements in a more carbon neutral world.

The same tailwinds are driving investors towards Ceres Power and Impax, an asset management house specialising in ESG.

Two questions hang over Aim’s outperformance. First, has this rally got further to run? Second, how far would any future removal of the IHT advantages dent its popularity with investors?

Simon Thompson, my former boss at the Investors Chronicle and compiler of its Bargain Shares Portfolio, says the small-cap bull run is far from over.

“The outperformance of small-caps reflects the higher weighting in Aim indices to fast-growing sectors (technology, ecommerce and healthcare) that are beneficiaries of benign monetary and fiscal tailwinds — it’s that simple,” he says.

Simon has an enviable crystal ball. He highlighted the likely sectoral winners and losers from quantitative easing in his most recent book, Stock Picking for Profit. While he wouldn’t claim to have predicted the pandemic, it has accentuated these gains as software and ecommerce companies exploit their prime positions, and healthcare stocks benefit from government largesse. However, even Simon accepts that “the easy money has been made”.

He predicts the next stage of the rally will be largely driven by earnings momentum and rotation from growth to value stocks as monetary policy starts to normalise — but pleasingly, this is a market that favours stock pickers.

Accordingly, his picks for the 2021 Bargain Shares Portfolio include Aim-traded mining, oil and gas companies, renewable energy, UK retailers, housebuilders and a royalty company. In its first six months, the portfolio has delivered a total return of more than 20 per cent (9 percentage points higher than the FTSE All-Share index).

As Aim has become bigger and more diverse, so too have its investors. Its ranks of fast-growing tech-enabled businesses have been pulling in the mainstream retail punters, while the growing size of Aim constituents has attracted more institutional money.

Both would help cushion the blow if Aim’s IHT advantage failed to survive post-Covid tax reforms. But if business property relief was limited, I do wonder how many investors would actually sell up.

Some might switch to other tax-advantaged investments like VCTs or EIS, or simply give the money away (assuming the seven-year rule remains in place). But the loss of BPR would be of no long-term consequence to institutions or younger investors like me. In the event of a sell-off, we’d have a chance to buy into the future growth story at a bargain price.

For now, another key Aim theme that is likely to develop is a surge in M&A activity. Simon Thompson notes that the average market capitalisation of Aim companies is at an all-time high of £178m, although the number of listed companies has halved since 2007. This, he says, is a reflection of their higher quality — a factor that will undoubtedly tempt predators to run their slide rules.

Claer Barrett is the FT’s consumer editor: claer.barrett@ft.com; Twitter @Claerb; Instagram @Claerb





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PayPal to acquire ‘buy now, pay later’ provider Paidy for $2.7bn

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Mergers & Acquisitions updates

PayPal, the US online payments company, has agreed to acquire Paidy, a Tokyo-based “buy now, pay later” group, for ¥300bn ($2.7bn) in the latest shake-up in the industry.

The deal announced late on Tuesday, which will be paid for principally in cash, deepens PayPal’s push into the crowded BNPL sector, in which consumers spread the cost of goods over a small number of payments, typically without interest and often without requiring a credit check.

Last month, Square, the payments company led by Twitter chief executive Jack Dorsey, acquired BNPL group Afterpay for $29bn, in the largest takeover in Australian history.

Shares in San Francisco-based Affirm, another BNPL company, soared last month after it announced a partnership with Amazon allowing shoppers who spend more than $50 to make payments in monthly instalments.

Paidy, founded in 2008, is one of Japan’s few “unicorns”, or start-ups worth more than $1bn. The company launched the country’s first zero-interest post-payment service last year.

While the global BNPL market has exploded in popularity owing to the pandemic-driven boom in online shopping, the trend is only starting to catch on in Japan, where consumers still depend heavily on cash payments.

Paidy allows its 6m registered users to split the cost of goods into three equal instalments with no interest. Users can pay off their balance using cash at convenience stores or bank transfers.

According to Yano Research Institute, the volume of transactions made through post-payment services in Japan is expected to more than double from an estimated ¥882bn in fiscal 2020 to ¥1.88tn by fiscal 2024.

Paidy was valued at $1.3bn when it raised $120m in March, and was expected to list its shares in Tokyo later this year. It has been backed by trading house Itochu, Goldman Sachs and Soros Capital Management along with PayPal.

Russell Cummer, the Japanese fintech’s founder, recently told the Financial Times that a public listing “made sense” — though no firm timetable had been established. Instead, the company is now expected to become part of PayPal by the fourth quarter of this year.

“Paidy pioneered ‘buy now, pay later’ solutions tailored to the Japanese market and quickly grew to become the leading service, developing a sizeable two-sided platform of consumers and merchants,” said Peter Kenevan, PayPal’s vice-president and head of business in Japan.

“Combining Paidy’s brand, capabilities and talented team with PayPal’s expertise, resources and global scale will create a strong foundation to accelerate our momentum in this strategically important market.”

PayPal said Paidy would “continue to operating its existing business, maintain its brand and support a wide variety of consumer wallets and marketplaces”. Cummer and Riku Sugie, Paidy’s president and chief executive, will continue to lead the company, according to a statement.

“Paidy is just at the beginning of our journey and joining PayPal will accelerate our plans to expand beyond ecommerce and build unique services as the new shopping standard,” said Sugie. “PayPal was a founding partner for Paidy Link and we look forward to working together to create even more value.”

The acquisition comes as PayPal rolls out its broader strategy to become a “super app” — incorporating payments, cryptocurrency investments and savings — drawing inspiration from under-one-roof Chinese apps such as WeChat.

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Bitcoin: El Salvador’s experiment does not warrant cross-cryptocurrency price rise

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Bitcoin updates

Early adopters of virtual currencies have a clear incentive to promote mainstream acceptance. The more buyers, the higher the price. Crypto fans, therefore, hatched an online plan to bolster bitcoin as El Salvador legalised the tokens for payments. That was logical. The knock-on rise in other cryptocurrency prices was not.

Bitcoin’s 8 per cent rise over the past seven days means that it is now worth about $51,000. But according to data from CoinGecko, which tracks more than 9,000 coins, it is not the largest mover. Ethereum, the world’s second-largest cryptocurrency, has leapt 16 per cent over the past week. Solana’s SOL tokens have risen 69 per cent.

There is no sensible reason for these rallies. El Salvador is not expected to make other virtual currencies legal tender. Instead, the jumps reflect a soupy mixture of low rates, blind faith and better investor access.

Trading apps make it easier for retail investors to buy cryptos. The initial public offering of Coinbase in April raised its profile, leading to a jump in downloads.

The make-believe world of nonfungible tokens, or NFTs, has also given cryptos a boost. These prove ownership of digital assets such as art, music or even virtual pet rocks. Many use the ethereum network. Solana, which is backed by Andreessen Horowitz, has its own NFT marketplace, Solanart.

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None of this, however, has anything to do with El Salvador’s attention-seeking adoption of bitcoin. This diverts domestic attention from the failing economy of this impoverished Central American nation, the first country to embrace bitcoin as legal tender. It also supplies cheerier news flow to bitcoin fans than did the cryptocurrency’s collapse in value this spring.

Rising prices mean the total market value of cryptocurrencies has reached nearly $2.4tn. It is rapidly closing in on the previous record of $2.57tn set in May. Bitcoin’s share of the market has fallen. It is now about 40 per cent, down from 57 per cent a year ago. Yet bitcoin remains a powerful bellwether.

This could be a problem if bitcoin’s latest rally depends on success in El Salvador. President Nayib Bukele says the country has purchased 400 bitcoins — equal to just 0.002 per cent of the outstanding value. Local opposition is widespread, suggesting take-up will be low. A damp squib is more likely than the financial dislocation some critics are prophesying.

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Europe stocks notch best day in 6 weeks on sustained stimulus hopes

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Equities updates

European equities had their biggest rise since late July on Monday as weaker-than-expected US jobs data suggested pandemic-era stimulus, which has helped prop up markets, may continue for longer than anticipated.

The Stoxx Europe 600 index gained 0.7 per cent, the region-wide benchmark’s best day in six weeks, as traders analysed the implications of a large miss in US job creation. Employers in the US added 235,000 jobs in August, which fell wide of economists’ projections of more than 728,000 new hires.

“The weak jobs number gave the Federal Reserve ample room to take it easy in terms of how and when it will taper” its $120bn of monthly bond purchases that begun in March 2020, said Maarten Geerdink, head of European equities at NN Investment Partners.

Before Friday’s non-farm payrolls report, some analysts had expected the Fed to announce a reduction of its asset purchases as early as this month.

European stocks, Geerdink added, were “in a sweet spot with the eurozone economy doing well while financial conditions remain extremely loose”.

London’s FTSE 100 index also ended the session 0.7 per cent higher while US markets were closed for Labor Day.

Column chart of Stoxx Europe 600 index, daily % change  showing European stocks notch best day in six weeks

Economists expect the European Central Bank to provide an update about its own debt purchases at its meeting on Thursday, with government bond prices signalling some expectations of a pullback. The yield on the benchmark German 10-year Bund, which moves inversely to its price, was steady on Monday at minus 0.37 per cent, around its highest point since mid-July.

Technology shares, which tend to perform well when expectations of low-for-longer bond yields flatter valuations of growth companies, were the best performers in Europe with the sector rising 1.7 per cent on Monday.

In Asian equity markets on Monday, Chinese shares rallied after vice-premier Liu He said the government would continue to support private businesses despite a regulatory crackdown across the technology and education sectors. 

“Policies for supporting the private economy have not changed . . . and will not change in the future,” Liu said in comments reported by state news agency Xinhua. The CSI 300 index of mainland Chinese stocks climbed 1.9 per cent. 

Japan’s Nikkei 225 gained 1.8 per cent as investors bet that last week’s abrupt resignation by prime minister Yoshihide Suga would usher in a successor more focused on protecting the nation’s economy from rising Covid-19 cases. 

Brent crude, the international oil benchmark, slid 0.7 per cent to $72.10 a barrel.



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