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Investing in penny stocks already carries the risk of increased volatility, and the waters could get even rougher on October 30. That will be when Chancellor Rachel Reeves will unveil the government's budget aimed at stabilizing the UK's public finances.
There are now fears that inheritance tax relief for AIM-listed companies will be scrapped. This may force financial advisors to recommend their clients sell AIM stock. This is due to “consumer rights” rules, designed to protect clients from potential losses that advisers could have foreseen.
Many UK small cap stocks, including most penny stocks, are listed on the junior market. According to estimates of peel huntinga City investment bank, the end of this tax exemption could cause an immediate 20% to 30% drop in the value of shares listed on AIM.
Uncertainty everywhere
Now, it should be noted that we do not know what will happen to the budget. There may not be any changes. He FTSE AIM All-Share Index It's only down 1.3% in the last month, so it seems investors are currently optimistic about it.
However, if this happens, it would clearly be bad for a market that is already struggling to attract listings. In fact, the London Stock Exchange has said the number of companies in its junior market has fallen to 704, compared with 1,694 in 2007. Rising volatility is unlikely to encourage more private companies to go public.
It is estimated that removing the tax exemption could raise £1.6bn a year. That's a drop in the ocean in the grand scheme of things (enough to pay interest on the public debt for a few days).
Therefore, I think it would be a short-sighted measure. Then again, I currently have five AIM-listed stocks in my portfolio, so maybe I'm biased.
How am I reacting?
A significant sell-off and a drop in market valuations could hamper the ability of AIM-listed companies to attract financing. However, your immediate daily business operations may not be directly affected.
Therefore, I would view a decline in small caps as an opportunity to buy into fear, to paraphrase Warren Buffett. One AIM stock that I would definitely like to buy 30% cheaper is Keystone Legal Group (LSE: KEYS).
The network-style law firm, which has a market capitalization of £182m, operates a platform where lawyers work as freelance consultants. This allows scalability without the high fixed costs of traditional companies.
Keystone has grown revenue at a decent pace and is solidly profitable. The stock also offers a dividend yield of 3.2%.
| Year (ends January) | 2023 | 2024 | 2025 (forecast) | 2026 (forecast) |
|---|---|---|---|---|
| Total revenue | £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, revenue grew 8.3% year-on-year to £46.5m, while 153 new “high caliberLawyers submitted applications during the period.
Looking ahead, a significant economic downturn could impact earnings growth. Additionally, the UK is now seeing an exodus of wealthy residents (Keystone offers a range of legal services that are often required by wealthy people).
However, I still think there is a significant opportunity for organic growth. As many law firms push to return to the office, Keystone's flexible model allows lawyers to work remotely and independently, potentially making it more attractive.
Plus, the company is led by founder James Knight, which I find appealing. Founders and CEOs often prioritize long-term business decisions, which aligns well with my own silly investing philosophy.
If there is a Halloween scare in AIM shares, I will buy this for my ISA portfolio.
