The New Year has brought a whole load of turmoil to global financial markets. The events of last year’s sub-prime lending crisis are still unfolding through pressure on the banking system and resultant credit crunch. The prospects for the US economy are looking decidedly gloomy and we all know that saying of conventional wisdom that when “America sneezes…”.

Over here we have our own homegrown problems, including the Northern Rock fiasco, the gaping hole in public finances, the stalling housing market, the government’s growing incompetence in all matters fiscal and financial. What is there to inspire economic confidence?

The small caps have not been immune to the turmoil and it was recently reported that the Hoare Govett Smaller Companies (HGSC) Index had underperformed the FTSE All-Share by a wide margin during 2007. This dramatic reversal ended a run of four consecutive years where the HGSC Index had out performed the rest of the market. The reasons appear to be a flight to the safety of the blue chips, which offer the perception of higher quality of earnings and greater liquidity against growing economic bad news.

This unholy exodus from small caps into the Footsie is not altogether rational given the difficulties of many of the top 100 companies. For example, four out of the five leading High Street banks have seen their share price halve over the course of the last year. Marks & Spencer and British Airways have followed suite, and more recently we have heard of massive job cuts at BP, which has seen its profits slashed. Increasingly “blue chip” seems to mean “big” and not much else.

This move out of small caps has continued into 2008 with January showing further acceleration of the trend. AIM companies have also been affected, but perhaps less so than the small-cap companies bumping along the bottom of the main market. AIM’s resilience may well be explained by the growing number of foreign companies making up the elements of its indices. Foreign companies will not be affected to the same extent by UK economic data.

Another indicator of AIM’s health is the record number of 72 acquisitions it notched up in 2007 compared with only 42 on the main market. It also led the field in IPOs where it beat the main market by a ratio of 4 to 1, recording a grand total of 204. These statistics are a more accurate barometer of AIM’s performance than a simple charting of the index as they reflect underlying confidence in the workings of the junior market.

So how can AIM keep its nerve and weather the storm against a backdrop of dismal economic news? The answer is to keep reinforcing the point that AIM has not experienced a large failure or anything even close to the failures on the main world stock markets:

• Ignore calls from the US for tighter regulation – This is merely sour grapes

• Keep the momentum of foreign admissions to counterbalance gloomy UK economic news – Yes, there will be lots of it in 2008

• Prospective AIM candidates and their advisers should keep a positive outlook. There is always money available for a good proposition.