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Investing in the penny market space already carries the risk of increased volatility, and things could get even more choppy on October 30th. That’s when Chancellor Rachel Reeves will present the government’s budget aimed at stabilizing Britain’s public finances.
There is now a fear that inheritance tax relief for AIM listed companies will be abolished. This could force financial advisers to recommend that their clients sell AIM shares. This is due to ‘consumer duties’ legislation designed to protect clients from potential losses that advisers may have foreseen.
Many UK petite caps, including most penny stocks, are listed on the junior market. According to estimates from Peel Huntcity investment bank, ending this tax break could result in an immediate 20%-30% decline in the value of AIM-listed shares.
Uncertainty all around
It is worth noting now that we do not know what will happen in the budget. Perhaps there will be no changes. The FTSE AIM All Share Index dropped by only 1.3% over the past month, so it appears that investors are currently confident about this issue.
However, if this happens, it will clearly be detrimental to a market that is already struggling to attract offers. Actually, London Stock Exchange said the number of companies in its junior market had fallen to 704, down from 1,694 in 2007. Rising volatility is unlikely to encourage more private companies to list on the stock exchange.
It is estimated that ending tax relief could potentially raise £1.6 billion a year. This is a drop in the ocean (enough to pay interest on the national debt for a few days).
That’s why I think it would be a short-sighted move. Then again, I currently have five AIM-listed stocks in my portfolio, so I may be biased.
How I react
Significant sell-offs and falling market valuations could hamper AIM-listed companies’ ability to raise finance. However, their immediate, day-to-day business activities may not be directly impacted.
So I would see a small-cap crash as an opportunity to buy fear, to paraphrase Warren Buffett. One AIM stock that I would definitely like to buy at 30% lower is AIM stock Keystone Law Group (LSE: KEYS).
The £182m market capitalization law firm operates a platform where lawyers work as self-employed consultants. This allows for scalability without the high fixed costs of classic companies.
Keystone is growing revenue at a decent rate and is solidly profitable. The company also offers a dividend rate of 3.2%.
| Year (end of January) | 2023 | 2024 | 2025 (forecast) | 2026 (forecast) |
|---|---|---|---|---|
| Total income | £76.4 million | £87.9 million | £94.0 million | £99.2 million |
| Net profit | £6.73 million | £7.65 million | £8.88 million | £9.07 million |
In the first half, revenues increased by 8.3% year-on-year to £46.5 million, with 153 novelhigh caliber” lawyers filed applications during this period.
Looking ahead, a significant economic downturn could impact earnings growth. In addition, the UK is currently witnessing an outflow of wealthy residents (Keystone provides a range of legal services that wealthy people often need).
However, I still believe there is significant opportunity for organic growth. With many law firms pushing to return to the office, Keystone’s adaptable model allows lawyers to work remotely and independently, potentially increasing its appeal.
Additionally, the company is led by founder James Knight, which I think is attractive. Founder-CEOs often prioritize long-term business decisions, which fits well with my own Foolish investing philosophy.
If there’s a Halloween scare in AIM shares, I’ll buy this one for my ISA portfolio.
