Once again, the world of small caps was overshadowed by macroeconomic and political factors. A plunging US market, a Bank of England interest rate rise, and the much-flagged UK mini-budget.
Of course, people being what they are, there was much more kickback on the tax cuts than there was in the dying days of the Boris Johnson era when they were hiked. Instead, it perhaps should have been the case that people rejoiced that for the first time in a long time we were treated to politicians who actually did what they said they would do.
Unelected Central Banks
However, a point that has not been highlighted as much as it should have been is the role of independent central banks. Or should I say, the role of unelected central banks. The problem here was highlighted this week. Both the Fed and the BoE are apparently set on delivering us a recession to eliminate inflation. The side effect of this is to risk crashing the stock market too. At the same time in this country, much of the good of the tax cuts is likely to be eroded by the higher cost of mortgages.
This really is an example of the left hand not only not knowing what the right hand is doing, but not wanting to. Given the emergency mode we are in currently in terms of the cost of living crisis, it really should have been the case that cutting inflation was sacrificed, along with the rise in rates. The “independence” of central banks may have to be changed.
Below July Lows
Moving to the small caps themselves, it can be said that the chart says it all. The small cap index is now lower than it was in the wake of the June – July sell off, when it would appear that the smart money exited ahead of the summer holidays. While this may have simply been to pay for the summer holidays, it is clear that a fresh driver is now needed for investors to return in a meaningful way. Historically, this has only happened when we are clearly in bargain basement territory, or have line of sight on a catalyst for recovery. The risk for the small caps index is that below 6,200 we head for 5,800, so another 5% of downside.
Nevertheless, the best thing about small caps is that they can rise (and fall) independently of the market as a whole, with company specific news being the driver. This was certainly the case at OTAQ (OTAQ) whose shares rose sharply as it announced its first order for asset tracking in the rail industry. The company also had the distinction of being one that few, including myself, may have heard of before the news dropped. Hopefully, it will become more high profile in the weeks ahead.
Egdon / Angus
Positive news on fracking should have helped companies in the space, although for the likes of Egdon (EDR), the old stock market adage of it being better to travel than arrive seemed to rule the day. Sticking with the urgent need for us to have a solid domestic source of energy, we saw Angus Energy (ANGS) shares hold their recent gains, as Managing Director George Lucan continue his recent PR offensive. Happily, this has taken on the appearance of being something of a lap of honour.
One of the downsides of being in soggy stock market conditions is that even when a company hits the ball out of the park, the reaction tends to be muted. Ordinarily, payments company Boku (BOKU) signing a three year deal with Amazon, would have delivered a soaring share price. In this case, we have a recovery, although it looks as though there will be more to come.
More intriguing was the near 100% share price rise for Eve Sleep (EVE), where clearly speculation regarding the formal sale process has taken a more positive turn. The problem in these situations is that the rise can be as much a result of short covering, as being the harbinger of good news. But with the stock having hit new lows earlier in the week, there may still be more in the dead cat bounce.
In contrast, a company that managed to close on the highs of the week was GreenX (GRX). The chart has been looking well poised in recent days, with the company announcing earlier this month that the arbitration proceedings against the Republic of Poland are “proceeding at pace.” Can we assume that a couple of weeks later, things are hotting up? Last month the company revealed 99% copper samples in Greenland.
Oxford Biodynamics / TomCo
Finally, a couple of titbits from sources as reliable as people who have DM’d me on Twitter. The first regards Oxford Biodynamics (OBD) where the disparity between the present share price of 12p, and broker targets over 200p has been highlighted. The apparent trigger for recovery here would be the possibility of sales starting next month, off the back of a reimbursement code for physicians.
On TomCo (TOM), the shares have recovered the 0.5p, on apparent hopes that the US oil development group is close to completing its financing.
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