Politics will exert considerable influence on markets in 2016 with November’s US presidential election, the UK in/out referendum expected over the summer and the escalating tensions in the Middle East. In each situation, the outcome is not assured and this is likely to drive volatility. There is also scope for other surprises. As widely expected, the US Federal Reserve increased rates in December but the Fed’s rate forecasts (a full percentage point increase p.a. to 3.25% at the end of 2018) are more hawkish than market expectations (about 50bps higher for 2016 and 100bps for 2018). Were the Fed to raise rates per its forecasts, either the US and world economies are more buoyant than many believe or the Fed could imperil the recovery through tightening too quickly. The outlook for the US economy is reasonable with the lower oil price and increased employment benefiting consumer spending. The Eurozone countries will also enjoy the lower oil price as importers and growth is anticipated across many member states. The outlook for China and the countries that rely on exporting commodities to China is more mixed, however. Growth in China seems assured but many believe it will fall short of the official target of 6.5%. The first data points of 2016, the official PMI and Caixin China Manufacturing PMI, both came in below consensus and pointed to a further contraction in manufacturing. The news resulted in sharp falls in Chinese indices, triggering the market ‘circuit breakers’ that were created last September, and weakness in other global markets. India looks set to be the best performing large economy in 2016 up 7.8%, a slight improvement on 2015, another oil price beneficiary. The recessions in the other two BRICs countries (Russia and Brazil) look set to continue. Shifting from macro to micro, 2016 should prove the defining year for many AIM-listed resources companies and we expect the shake out that occurred in 2015 will continue as many micro-caps are unable to secure additional funding. Beyond resources, the outlook is more benign with a stable economic backdrop, further M&A activity and fund inflows looking for better returns.
- Mining: December saw a small rally for London listed mining and exploration companies with 35% of miners seeing a positive share price movement during the month compared to an average of 17% for the year. Overall, 2015 was slightly worse than 2014 and 2013 (80%) with 83% of miners seeing negative or unchanged share price movement during the year. This performance is reflected by the continuing shrinkage of the total market capitalisation of the AIM mining sector during 2015 to £2.7bn (as of Nov-15) from a high of £15.1bn in 2010. This marks the lowest level since 2002 when the sector was just being established on AIM. The number of AIM quoted mining companies is now at its lowest level since 2004 and the average market cap at £21.5m is the lowest since AIM was formed. New issues and the amounts raised from new issues in the sector were also at the lowest levels since AIM’s creation, and further issues were vastly down from a high of £1.7bn in 2007 to £379m as of Nov-2015. This month, we updated our forecasts and downgraded our price target Stratex International* (STI.L, BUY, PT 7.3p) following the successful sale of the 1% royalty on the Öksüt Gold Project, Turkey.
- Healthcare: Evgen Pharma* (EVG.L, BUY, PT 79p) reported maiden interims in line with expectations and we expect losses to increase in the full year as the company ramps up development costs. Management reported that preparations for the trials and studies of its lead treatment, SFX-01, are proceeding to schedule. Motif Bio* (MTFB.L, BUY, PT 114p) announced that clinical trial supplies of iclaprim have been manufactured and, following quality assurance, these will be shipped to clinical trial sites. We remain confident that Motif is on target to complete the two planned Phase III skin trials by the end of 2017.
- Consumer/Leisure: Fishing Republic* (FISH.L, CORP) raised £0.5m in December to enable it add two more retail stores (Swindon and Crewe) that takes the network to 10 stores. It also appointed Russell Holmes as Finance Director.
- TMT: Starcom* (STAR.L, CORP) announced a supply and support agreement with Pinnacle Systems, based in Kenya, for the supply of Helios units. Under the agreement, Pinnacle has committed to purchase units over a three year period – $5.5m on the basis of the quantities specified. Pinnacle is a leading supplier of road safety, fleet management and vehicle security systems in Eastern and Central Africa. A pre-close update from Amino Technologies (AMO.L, BUY, PT 155p) stated that FY15 is in line with forecasts that were reduced with October’s warning but cash was £2.1m better.
