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Dubai: Some small-cap stocks in local markets have stood out this year, outperforming the blue chips in a big way.
The surge in share prices of some of these companies has been phenomenal - a couple of them jumping 300 per cent and more. Of those, the majority are listed on the Abu Dhabi Securities Exchange (ADX), which has advanced more than 12 per cent this year.
The Dubai Financial Market General Index, on the other hand, is down nearly two per cent.
With a handful of large capitalisation stocks dominating the UAE market - on ADX the top five stocks comprise 60 per cent of the total market capitalisation - large movements in very small stocks will hardly have any impact on the index.
With small market capitalisation and limited trading volumes in the case of most of these companies, the more interesting question is: what has led to the surge in their prices?
A majority of analysts and traders agree that a lot of trading in these stocks is speculative. "What are they doing? Have they discovered goldfish?," remarked Mousa Haddad, Head of Trade, Discretionary Mandate, National Bank of Abu Dhabi, when talking about Asmak's 369 per cent jump, as one of the examples.
Some of these companies, as another analyst says, had moderately good results in the first quarter; nothing fantastic. "There was growth, but not good enough to justify the price move of 60 to 70 per cent," says Mohammad Ali Yasin, managing director of Shuaa Securities.
Long-term trend
Are the price trends sustainable over a longer period? "From history, yes, because the management of these companies are good, they are working on the right track, but it is a slow track," Yasin says. "[For example] Arkan, [which] is into building materials, the demand is highest ever and it is living in the boom years, but I think that [the market is] booking share prices of two or three years in advance now."
The majority of such firms have not come up with any major announcements or, for that matter, no regulatory development has marked them out with a huge potential.
Interest in these stocks is mostly local, observers point out. Though again not generalising, the role of speculators in concentrating on certain stocks for a short period is what ramps up their share prices. And there is a certain process to it.
"There is a group of speculators, who have ample liquidity and who have found a chance - that because the bigger investors, institutions and foreign investors, are out of the market, they would be able to direct this liquidity to these shares," says Yasin. According to him, speculators use text messages and chat rooms to rally certain stocks. "[Then] small retail investors jump on the bandwagon. After a period of time what you find is they book profits, get out of that share and move to another," he adds.
Is that legal? "They are still trading within the parameters of the law. But for some, it could be considered as manipulation," says Yasin.
This is not to deny that there are always opportunities in the market, and some investors are savvy to tap them.
It is also possible, says Amr Al Maghrabi, chief technical analyst at Cairo-based Beltone Financial, that some of the cash is flowing out from big-caps into small-caps. "Instead of liquidating and escaping to banks the investors might be preferring to circulate their money within the market."
In following such stocks, some investors can be within the loop of information and sometimes out of it, and - although it doesn't look like it would happen in the short term - if a wide spectrum of the market heads downward, the prices of these stocks will crash and investors would get exposed, but will not be visible because of their small numbers.
"Should we see a sudden sell-off [in these stocks], it does not always mean a headlong fall of the market. The selloff in small-caps may mean strong buying in big caps if valuations are attractive," Al Maghrabi adds.
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