London's AIM faces thinning stocks and investors

London's junior AIM market has beaten the main market so far this year, but will struggle to maintain that performance as the market thins out and investors hungry for high risk become fewer and harder to please.

"AIM could underperform over the rest of the year, or certainly over the next quarter and a half," said Jonathan Guy, analyst at Investec Securities. "We expect a bit of a pull-back over the summer."

Shares on the Alternative Investment Market have risen 22 per cent this year, after losing 64 percent in 2008, while the FTSE 100 .FTSE has dipped 1.6 per cent following a 31 percent fall last year.

But Stewart Dick, an associate at smaller company broker Daniel Stewart, said investors were raising the bar on smaller stocks. They might still be willing to buy companies with market capitalisation of £25 million, he said, but not £2.5 million, while Investec's Guy expects firms valued at less than 15 million to struggle.

And many of those smaller firms will join an already established exodus; the number of companies on AIM has fallen from 1,694 at end December 2007 to 1,454 at the end of April.

David Buxton, Head of Research at Finncap, says there will be a continued shakedown.

"We've had a couple of hundred stocks delist for one reason or another over the last nine months to a year that partly reflects the inability of the market to fund loss-making companies ... I think that's in part going to continue."

Biotechnology and resource exploration companies are often seen as the most likely candidates to delist as they have no revenue, little cash, and can be years away from production.

Mr Guy said many of the fund managers who used to invest in very small mining deals had disappeared from the market.

Mining companies, the largest group on AIM in terms of value, have seen a 13 percent drop in their number in the past year, while pharmaceuticals and biotech companies had thinned by 22 per cent.

Tim Williams, director of metals and mining at Ernst & Young, said he was surprised more mining firms hadn't delisted and expected to see a jump in delistings this year.

"A lot of little companies are walking dead at the moment ... When you have seen how cheap some of the big companies are, why invest in an exploration company when you can invest in Xstrata," said Williams.

Some exploration firms, such as Mwana Africa, have suspended work, while biotechs such as Lombard Medical have stopped non-core trials in an effort to conserve cash.

Andy Smith, healthcare portfolio manager at Axa Framlington, said he would stay on the sidelines of AIM for the immediate future because the longer the funding freeze takes to thaw, the more investors would give up and more companies liquidate.

"I think AIM... had too many companies IPO-ing at too early a stage in the last 18 months," he said, naming Norwood Immunology, York Pharma and Neuropharm as examples.

He said that once companies were able to raise cash again, some investors who had been locked in for 18 months would take that opportunity to get out, putting a lid on any recovery. Richard Thornhill, capital markets director at business advisory firm Deloitte, said just 3 million pounds of new money was raised on AIM in the first quarter, compared with more than 300 million in the year-earlier quarter.

Investec's Guy expects very little initial public offering activity. He expects to see large pre-existing companies, similar to Fresnillo, listing on AIM rather than a plethora of small companies, although these are unlikely to happen in 2009.

The new head of AIM, Marcus Stuttard, told Reuters last month that he expects an upturn in IPOs by 2010.