The market's action in the opening weeks of January is a good guide to how the entire year will unfold.Fund managers for instance, will have spent December polishing their economic forecasts and setting out their strategy for the next 12 months. As soon as January arrives, they race to place their bets and the annual contest for bonuses is under way again.
The message this year is that they expect small companies to continue to outperform. While the 0.1% fall in the FTSE 100 share index in 2011 so far suggests an equivocal attitude to equity markets in general, the FT Small Cap and AIM indices are up 1.5% and 2.3% respectively.
Clearly, this is whereinvestors see value and the opportunity for real corporate growth, and I would be the last to disagree.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
The electric recovery of the AIM index
Down in Fleet Street, headline writers are preparing to herald the return of the AIM market index to 1,000. Having risen from the depths of 389 in February 2009 to todays 955 it just needs to keep going for a little longer to breach the four-figure mark.
For seasoned AIM watchers this will bring a sense of dj vu. 1,000 was the starting level for the AIM index when it opened in 1995. One glorious splurge took the index to the giddy heights of 2,745 in the dotcom boom - before the inevitable reaction reduced it to 540 in March 2003.
Other small-cap news
- Mobile Streams (MOS) shares gain 10% on revenue hike
- Shares in Mobile Streams (MOS) gain 10% after it reports a 40% increase in revenues in 2010
- Mobile Stream retails Apps, Games, eBooks, music and videos through mobile carrier partners and its Appitalism.com App store
- Chief executive Simon Buckingham is looking for "significant growth over the coming years"
A steady recovery took the index to over 1,200 in 2007 before the financial crisis brought it down once again. This time, if the index goes into positive territory once more, can it stay there?
Well, a rising index acts like a flame to the moths, and in this latest cycle the willingness of investors to back exploration companies has brought plenty of company promoters out of the woodwork. Today, about one quarter of AIM listed companies are involved in the oil and mining sectors, but they account for about half of daily share trading. Private investor participation in the mining sector is undoubtedly keen, and this sounds a warning bell.
But the AIM index looks less vulnerable now than it has after previous bull phases. Small companies are only just beginning to come back into fashion. The number of new AIM issues, even in the natural resource sector, is still a trickle rather than a flood. While confidence is returning, there is no sense yet that expectations have spiralled out of control.
With Chinese demand the main driver of commodity prices, there is no doubt that if China sneezes many small company investors will catch a cold. And yet profit forecasts for most mining and oil companies are based on product prices that are below today's levels, and enthusiasm for these stocks looks far more soundly based than the dotcom mania.
Claim your special FREE report: 10 simple rules for maximising your penny share profits
- Receive the stock market wisdom of a top-level penny share expert
- Your essential guide to playing the small caps market
Who will be the share heroes of 2011?
So it is no surprise to see natural resource shares amongst the early movers in 2010.Roxi Petroleum(LON:RXP), Beowulf Mining (LON:BEM), Amur Minerals (LON:AMC), Tertiary Minerals (LON:TYM), Namibian Resources (LON:NBR) and Atlantic Coal (LON:ATC) have already made strong gains.
Bio-energy play Viridas (LON:VIR) is amongst the leaders as is Third Quad Capital(LON:TQC), which has announced a possible sale of its software business. Distressed lender Davenham Group (LON:DAV) has seen its shares bounce on the back of a possible financial reconstruction while Crosby Asset Management (LON:CSB) is changing its spots to become an investor in natural resources.
Finally and intriguingly barging its way into the leading group is @UKLtd (LON:ATUK), whose software enables public sector bodies to both save money and prove their green credentials.
As ever, there are some unfamiliar names here. By the end of the year they could be on the lips of every investor. Or else, like frontrunners in the Grand National, they may fail to last the course.
But one thing is for certain - 2011 will bring a fresh crop ofpenny share heroes. And I'm not wasting any time placing my bets on who they'll be.
Most readers of my Red Hot Penny Shares will have been heavily invested in the oil and mining boom for some time. And I've also been recommending some stellar penny stocks for the year ahead.
These are companies that I think are poised to benefit from radical developments this year in metals, internet security and biotechnology. I personally see huge potential for penny shares at the forefront of these developments.
Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Past performance and forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you've bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.
This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.
Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.
Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.
Follow Tom on Google+.
From oil to copper: how to trade wisely when capitalising on mega trends
By MoneyWeek Published
Thousands of pensioners forced to claim back huge amounts in emergency tax
Some retirees are losing more than £50,000 in emergency tax when they withdraw money from their pensions, which then has to be clawed back from HMRC.
By Ruth Emery Published
The end of the war on drugs?
Features Two American states have legalised the use and possession of marijuana – is this the start of a ceasefire in the global war on drugs? James McKeigue reports.
By James McKeigue Published
Is Britain on the road to disaster?
Features George Osborne is now relying on quantitative easing to fund spending. That is dangerous, says John Stepek – investors should act now to protect their wealth. Here, he explains how.
By John Stepek Published
Three growing trends that will make you big profits on the internet
Features More and more of us are online – looking for love, for entertainment, or for a quick buck. Backing the leaders will prove lucrative, says James McKeigue. Here, he tips four stocks to buy now.
By James McKeigue Published
Your ticket to an energy bonanza in East Africa
Features Southeast Asia is increasingly turning to Africa to fulfil its energy needs, says Lars Henriksson. Here, he explains why, and reveals the best way to profit.
By Lars Henriksson Published
How to profit from 'smart farming'
Features The global food supply is under pressure from the growing world population. That's creating some interesting developments in farming, says Merryn Somerset Webb - and opportunities for investors.
By Merryn Somerset Webb Published
Two ways to play the Latin building boom
Features While Britain wallows in debt, Latin America is forging ahead with massive infrastructure projects, says James McKeigue. Here, he reveals a great story that most investors are missing out on.
By James McKeigue Published
Could Cuba become oil-rich?
Features Vast untapped oil reserves off the coast of Cuba could spell an oil bonanza for the Caribbean island. It's high risk, says Tom Bulford - but for plucky investors, the rewards could be massive.
By Tom Bulford Published
A small-cap manufacturer on the road to recovery
Features Latest figures show that the UK's manufacturing sector is bouncing back faster than anticipated. Tom Bulford picks one small-cap firm that took a battering, but which is now staging a recovery.
By Tom Bulford Published