Small caps in focus as retail investors dominate

Small-cap shares favored by local retail investors are set to dominate activity in Gulf stock markets next week as big institutional investors stay on the sidelines, worried by the euro zone debt crisis and instability in the global financial system.

A handful of stocks on the Kuwaiti bourse accounted for over a third of daily trading volumes this week as investors targeted highly liquid small-caps. A similar pattern was seen in Saudi Arabia's market.

Although some heavyweight firms such as petrochemicals have posted strong third-quarter earnings, they are largely being ignored in favor of speculative stocks, as investors look for short-term trades with easy exits rather than those which require the investment of substantial funds for long periods.

In Kuwait, small-caps Al Mal Investment, Hits Telecom Holding, Coast Investment and Development, National Investment and Gulf Investment House accounted for about 35 percent of total volume on Tuesday, among a total of about 200 listed securities.

"Investors now prefer to pick small-cap, undervalued stocks," said Fahad Al-Sheraian, general manager at Union Securities Brokerage.

"Most traders are becoming day-traders because it's less risky and more liquid. International markets are still in turmoil and the picture is not clear yet on a European resolution."

Egypt's stock market has been rising since it hit a multi-year low three weeks ago; traders say some investors think prices fell low enough to justify the risks surrounding the political transition to civilian rule. The index is still 40 percent lower than its level at the start of the year, so the rally may continue, though in low volumes.

"There is optimism in the market this week and hopefully this can continue into next week," said Margo Moussa, fundamental analyst at Arab Finance Brokerage.

Planning Minister Fayza Aboul Naga said on Monday that Egypt would discuss financing from the International Monetary Fund with IMF officials this week with an open mind, after Cairo turned down $3.2 billion in loans offered by the Fund this summer. Any deal with the IMF could improve market sentiment significantly by easing uncertainty over Egypt's funding of its budget deficit, and by creating a precedent for other foreign lenders to follow.

Michael Millar, head of research at Naeem Holding, said the country was now in a relatively quiet phase politically as candidates registered for parliamentary elections due to start on Nov. 28, and this could lend support to the market until voting began.