From Iran to AIM: How risk-off markets are squeezing small caps and shutting the funding taps

From Iran to AIM: How risk-off markets are squeezing small caps and shutting the funding taps Proactive uses images sourced from Shutterstock

You'll hear the term 'risk-off' thrown around almost without a second thought. It's the sort of shorthand market commentators use to liven up analysis and to sound knowing without always explaining what the phrase actually means.

Given it has become a defining feature of the current backdrop, it's probably worth unpacking it with a real-world example.

Instinctively, most investors understand the idea. But the mechanics are worth spelling out. When uncertainty rises, the recent Iran conflict being a prime example, investors prioritise capital preservation over return generation.

Money rotates out of riskier equities and into perceived safe havens such as government bonds, gold, cash and defensive large-cap stocks.

Small-cap companies tend to feel the effects more acutely. Many are earlier in their growth cycle, have narrower revenue streams and rely more heavily on external financing.

That makes them particularly sensitive to tightening liquidity and shifts in sentiment. When risk appetite deteriorates, these positions are often the first investors cut.

Market structure amplifies the move. Small caps typically have lower trading volumes and thinner institutional ownership than blue-chip companies.

As a result, relatively modest selling pressure can trigger outsized price declines, reinforcing the volatility that tends to characterise risk-off phases.

Vivid illustration

A vivid illustration can be seen in the AIM All-Share down 2.6% this week and off around 7% since the US and Israel began bombing Iran and the conflict morphed into a high-stakes geopolitical chess match centred on the Strait of Hormuz.

That may not sound dramatic, but in market terms it is a meaningful shift.

Yet the consequences go beyond a sharp move lower in share prices.

In risk-off markets, smaller companies that rely on venues such as AIM for investment capital can suddenly find the funding taps turned off and firmly welded shut.

New listings slow to a trickle as investors become reluctant to commit fresh cash. That would be challenging at the best of times, but AIM has already been stuck in a fundraising rut since the outbreak of the Ukraine war four years ago.

So that's risk-off for you.

The week's biggest mover has managed to tap the markets, though it came at a cost for current shareholders. Shares in Light Science Technologies fell 63% as it secured around £6 million. The discount at which it was forced to market shares drove the stock lower and is undoubtedly symptomatic of the risk-off attitude described above.

What seems to have gone unnoticed is the potentially transformational nature of the main acquisition the investment round is funding, which cements the company's growing presence in fire protection.

Story Continues

Vertigo, or top-slicing?

Up almost 470% year to date, investors in Galantas Gold Corp (AIM:GAL, TSX-V:GAL, OTCQX:GALKF) came down with a case of vertigo (or at least top-sliced to book some gains) as the shares fell 40%.

The week's big gainer was 88Energy, the Anglo-Aussie oil explorer with assets in Alaska and Namibia. The explanation for the 77% rise in the share price is technical.

Fundraising rounds brought on board a number of shareholders with small stakes in the business. The group opened a facility that allowed over 6,000 of them to exit the register.

The process created what's called a stock overhang, where the selling depresses the price until the sellers are cleared. Then, in the process of stock market isostatic readjustment, the exit of the sellers caused the stock to spring back to levels last seen early last year.

Up 70%, the IT support specialist CloudCoCo PLC (AIM:CLCO) was buoyed by plans for a modest fundraiser, a capital rejig and the commitment to some fairly punchy revenue targets.

Catenai, the digital solutions group (never know what that term means), also had a week to remember as the shares advanced 48%. Driving it was the launch of investee company Alludium's no-code AI agent platform. Catenai has doubled down on its investment in Alludium by chipping £250,000 into the latter's latest funding round.

Where there's muck there's brass

And finally, ATOME PLC (AIM:ATOM), the AIM-listed low-carbon fertiliser developer, rose 24% on Friday after it signed debt financing agreements worth $420 million for its planned plant in Villeta, Paraguay.

The fifteen-year debt package was signed on 12 March at the annual meetings of the Inter-American Development Bank Group (IDB Group) in Asuncion, and has been provided by a consortium of five development finance institutions.

Around 25% of the debt has been provided on concessional terms, meaning at below-market interest rates, which ATOME said would reduce its overall cost of capital and improve returns.

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