Richard Thornhill, capital markets Director at Deloitte, commented: "The extremely low levels of activity in quarter four are the culmination of a year of turmoil for the AIM market, which appears to have suffered particularly severely from the wider upheaval in the world economy:

* Fewer companies are coming to the market, and they are smaller - there were 114 listings in the year with average market capitalisation of £45m, compared to 284 listing with an average market capitalisation of £63m in 2007 (both periods being lower than AIM's peak across 2005 and 2006 which saw 519 and 462 listings respectively);
* Fundraising has been significantly more difficult - £1.1bn of new money was raised by companies listing on AIM in 2008, and £3.2bn of secondary funds were raised by companies already listed (2007: £6.5bn new money and 9.6bn secondary);
* The number of companies on the market is falling after a decade long run of expansion - number of companies at 31 December 2008 was 1,550 compared with 1,674 at 31 December 2007; and
* Market values have been routed, with the total capitalisation of the AIM market falling a remarkable 61% in the year from £97.6bn to £37.7bn.

These dramatic movements in the year have resulted in a change in the tone of commentary and general optimism surrounding the AIM market, from a major UK success story to a market where investors should be very wary indeed. But is this a fair assessment of the market as it stands today? Thornhill highlighted the following observations:

"Reviewing the largest companies by market capitalisation at December 2007 against 2008 shows many natural resources, oil & gas and mining companies on both lists. However, in line with valuations on the London Main List these have shown significant reductions in market capitalisation during the course of 2008.

"It is particularly notable that many of the largest companies on AIM at the end of 2007 were real estate holding and development companies, wanieanies, which represented 11 of the 50 largest companies (22%). Fast forward to 2008 and the negative sentiment around global real estate has seen many of these companies shrink in value, such that only 5 of the top 50 companies are in this sector, and again at a much reduced valuation

"The reduction in the significance of these two sectors over the year does appear to have led to a broadening of the industry make-up of the largest companies on the market. The top 50 companies now include a number of industries of previously limited significance, such as Insurance (Lancashire Holdings and Omega Insurance) Biotechnology (ABCAM), Gambling (Sportingbet), Food Wholesalers (Booker) and even the return of Internet Retail (ASOS)

So it appears that AIM has been particularly hard hit due to its exposure to mining, gas and natural resources, plus real estate - but considering the market today and looking forward this appears to have left it more diversified as at the end of 2008."
What do we expect going forward into 2009?

Thornhill commented: "It is difficult to foresee any change in the negative sentiment towards AIM in the short to medium term.

"At the time of writing there have been no new admissions to AIM since the turn of the year, suggesting that the market remains effectively closed. There is a continuing shake out of the more speculative propositions on the market as economic conditions stress all but the most solid business plans. This has led to shareholder losses as well as ongoing adverse media commentary. We believe institutional shareholder continue to question the overall rationale for investment in small cap companies.

"Despite the negative sentiment surrounding the market there are undoubtedly good companies on AIM that can be held up as success stories - it is a fallacy to suggest that all AIM companies are poor propositions.

"However, we expect that a re-evaluation of the potential for the AIM market as a whole will prompt a certain amount of consolidation. Companies that are over-leveraged or generating weak revenues will look to ensure their own survival by seeking transactions with the companies which have benefited from the resources boom. This consolidation, along with renewed investor appetite for growth companies, are both pre-requisites for a return to the positive outlook of recent years."

We will continue to track the AIM market for signs of life in 2009.