There are two investment themes that matter more than any other at present. Thanks to these powerful forces penny shares are leaving their big brothers in the dirt. Investors ignore them to their cost.
So far this year the FTSE 100 index of blue-chip shares has returned a measly 1.4%. Since its low point in February 2009 it has struggled up by 46%. AIM, the market on which almost all good small companies have their shares traded, is up 19% since the start of the year and up a rip-roaring 97% since its low of December 2008. And there is no sign that this is likely to stop.
Judging by trading volumes, interest in penny shares is gathering pace. Every day a steady stream of them are seeing double-figure gains.
- Avocet shares jump 44% after positive update on Inata gold reserve
- Shares in Avocet Mining (ticker: AVM) tick up on the announcement of a 25% increase in proven and probable ore reserves at the company’s Inata gold mine in Burkina Faso.
- CEO Brett Richards said: “The increased mineral reserve confirms our belief that Inata will become a significantly larger producer than indicated on acquisition.”
Take Tuesday 28 September, for example. GGG Resources (LSE: GGG) (mentioned here) saw its share price gain 20%. Solomon Gold (LSE: SOLG) was also up 20%. In fact, no fewer than 14 penny shares gained 20% or more.
And what of the FTSE 100? Here the top performer was First Group (LSE: FGP), which hauled itself up by just 6%. It was followed by Wolseley (LSE: WOS) and BP (LSE: BP), which both gained 5%.
The cheetahs of the small-company world, apparently a threatened species just two years ago when financial advisers were recommending the supposed sanctuary of the blue-chips, are now outrunning those elephants. And this is no fluke.
Two investment trends are central in today’s world, and the way to play them is through penny shares.
Two trends that penny share investors can’t afford to ignore
Those two themes are natural resources and technology. The former is well rehearsed by now and centres on the urbanisation of China. By 2025 another 500 million people will have left the fields to live in town. In the next decade the number of cars on China’s roads will double to 200 million.
Whether it is washing machines, copper cable, fast food or any of the other essential ingredients of contemporary urban living and the story is the same. China’s demand is insatiable. The country desperately needs to get its hands on supplies of raw materials and it is not afraid of flexing its financial and political muscle to get what it needs.
Across the board, raw material prices are at high levels. And, short of the Chinese engine stalling, they seem destined to stay that way.
It is just not so easy to increase supply. It takes time to uncover new metals and cultivate new crops. Meanwhile existing sources, of diamonds for instance, are facing rapid depletion.
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This has a very welcome consequence for miners and other junior natural resource prospectors. As I said on Tuesday, they cannot believe their luck.
Just at the moment when they are closing in on first production, product prices make their financial projections look mouth-wateringly profitable. And whether it’s simply to make a profit or to secure essential feedstock, financiers are ready to give them all the money they need to take their projects through to production.
Despite the hiccup of 2008, investors in the natural resource sector have not had to wait more than four or five years for gratification. The story of technology is different.
The rebirth of technology – and my best way to play it right now
The Techmark Index of the London Stock Exchange, launched in 1999 to capture the performance of the white-hot technology sector promptly went from 1000 to 5743 before crashing back to 593 in 2003.
Since then it has been a long climb back. Today the index is at 1956. But finally some of those dreams that so excited investors a decade ago are becoming a reality – universal wireless connectivity, a portable world of information and entertainment, shopping at the click of a button.
Unlike natural resources, which are produced largely by tried and trusted means, new technologies have had to wait until the appropriate tools have been designed and the distribution channels opened for their business models to become effective.
Now we have reached this point and fully functioning technology is at last allowing new businesses to be created. These businesses are reaching customers online, supplying services over the mobile internet and offering new means of entertainment and networking.
It’s an incredibly powerful trend and I think as penny share investors, you and I are best placed to profit from it. You just need to know which companies to pick, as they will not all make it.
Why penny shares are the best way to play these trends
It is in these industries, technology and natural resources, that fortunes are being made and will continue to be made for the next few years. Property, building, retailing and banking have had their day and will continue to struggle as western economies retrench. And herein lies the attraction of penny shares.
While the FTSE 100 share index is still weighed down by these dinosaurs of a former age, AIM is bursting with junior natural resource companies and exciting technology plays.
Of AIM’s 1,212 listed businesses, 482 fall within these categories and account for almost half of their total value. With this heavy weighting to the world’s best money-making opportunities, to my mind outperformance of the penny share sector looks assured.
• This article was first published on 30th September 2010, in Tom Bulford’s twice-weekly small-cap investment email
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