Dubai: Investors will have to learn to play to the swings of small-cap stocks on the UAE’s stock markets while they wait for blue-chip companies to stage a comeback.
Smaller stocks listed on the Dubai Financial Market (DFM) such as Gulf Finance House (GFH), Shuaa Capital, Gulf Navigation, HITS Telecom and Union Properties gained 167 per cent on an average in 2016, compared to the bourse average of 12 per cent.
“If we were to take a 30,000-feet view of our recent market performance, it is apparent that the Dubai [index] and the Abu Dhabi [index] — to a lesser extent — have undergone bouts of sentiment-swings led by the small caps,” said Farid Samji, head of asset management with Daman Investments.
In stock-specific movements, GFH gained more than 300 per cent last year, while Shuaa Capital rose by 264.5 per cent. Blue chips like Emaar Properties gained 25.3 per cent in the 12 month period running up to December 2016 while Emirates NBD rose 14 per cent in the same time period.
Market experts say small caps are mainly being driven by retail traders — with or without any fundamental factors.
That has given fund managers confidence in the market due to surging volumes.
Different types of investors
“There are different types of investors. Some look for highly volatile stocks regardless of the fundamental story behind them and on the other hand, you have more sophisticated institutional clients who understand companies’ earnings, and judge according to their risk and returns requirements [when] buying a stock,” Tariq Qaqish, managing director of Asset Management at Al Mal Capital said.
Samji from Daman Investments also agreed.
“It’s the sentiment that is expressed by the so-called ‘noise investors’, underlined by swings in investors moods and daily trading volumes especially in small caps,” Samji said.
“The activity gets consolidated by yet more retail class investors with risk capital who join in the re-affirmation stage with high-beta names joining the foray.”
But there is a positive side.
Since mid 2016, small cap stocks have pumped up the volumes — a far cry from what happened in 2014 when the blue chips contributed a larger stake to the liquidity pie.
Traded volumes recovered from around the Dh500 million mark in 2015 to average Dh1 billion last year.
However, total volumes still fall short of the Dh2 billion average registered in 2014.
“[Over the] last three months of 2016, traded volumes improved on the back of the rallies in small caps — which gives me some optimism,” Samji said.
Daman Investments chairman Shehab Gargash said the small-stock rally should be seen as a phase coming just before attention shifts to blue chips.
After the initial rally in small stocks, the focus is expected to shift to blue chips, which are considered a safer option for investors.
“Step 3 would be market euphoria — when valuations go completely go out of hand because there is so much demand chasing so little volume and when we arrive the peak of the cycle,” said Gargash of Daman Investments.
Only active fund managers will be able to profit from this.
“A buy-and-hold benchmark index investor in the UAE may not do very well,” Samji said.
Active trade advantage
“Active trading strategies may fare better. One may see a lot of trading activity as well as bouts of swings and sideways movement and may not get compensated adequately for the ride,” he added.
“Only portfolio managers with an active trading element in their strategy will benefit.”
Al Mal Capital’s Qaqish offers a simple piece of advice.
“Investors should be looking at fundamental story behind before buying stocks and understand that there are enough reasons and clarity that [a] company will make solid money in the future, not to be driven by only news and speculation,” Qaqish said.
