Dubai penny stocks now look set for a fall

What's Down: Gains on penny stocks are at risk of a correction if momentum runs out of steam, EFG Hermes has warned.

There has been a rush of speculative money from retail investors into penny stocks in Dubai recently but the party may be near its end.

Penny stocks have had the biggest gains this year as investor sentiment has picked up and the Dubai Financial Market General Index has rallied by about 30 per cent in the year to date.

"Retail-favoured penny stocks (mostly small caps) are at risk of a sharp correction once momentum subsides," EFG-Hermes said in a statement.

"Stocks with a share price below Dh1 on December 31 2011 year have risen the most year-to-date and have the highest turnover. This is followed by stocks with a price of Dh1 to Dh2, while stocks with a price above Dh2 have trailed."

This means that large-cap stocks are more likely to hold on to gains if investors start profit-taking, EFG-Hermes added.

Other analysts have expressed concern about the pace of the rally.

"Now it is becoming dangerous. You can't have small companies up 100 per cent in just a few weeks. [It is] not about underlying fundamentals, but pure speculation," Sebastien Henin, a portfolio manager at The National Investor in Abu Dhabi said. Penny stocks that have surged recently include Union Properties, which increased its share price to trade at 48 fils yesterday afternoon compared with a low of 23 fils in January. Tabreed has likewise risen from a January low of 40 fils to Dh2.13. Deyaar meanwhile was at 43 fils yesterday afternoon, compared with 20 fils in January.

But in broader terms, EFG- Hermes is anticipating consolidation rather than a sharp correction in the whole market.

"With trading activity having recovered substantially, we expect Dubai to consolidate close to current levels rather than correct sharply, as per the previous three rallies in Dubai, bringing the market down by only 5 to 10 per cent."

There could be room for further gains later in the year, EFG- Hermes added.

"Latecomers to the party have missed out on a substantial rally so far, but we believe there will be a further opportunity later this year," it said.

"We believe that Dubai is turning a corner with respect to its debt restructuring. This, along with the return of western institutions, should be supportive even as global volatility continues."

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