Two sides to the penny rally

Singapore

SINGAPORE-listed penny stocks surged over the past week as they caught an updraft of interest, sparking hopes of a sustained rally on one hand and concerns about blind speculation on the other.

The smallest 20 per cent of Singapore-listed stocks by market capitalisation saw their prices climb by about 13.9 per cent on average between July 16 and 23, easily outpacing the rest of the market. The largest 20 per cent of stocks rose just 3.5 per cent in that time.

It was not just prices that were buoyant. Each stock in the smallest fifth of the market saw their daily turnover-to-market cap ratio rise by 0.5 percentage point during the same period. The increase was almost flat for the rest of the market.

If there was a fundamental underpinning for the rally, its nature remains elusive to those in the market.

"It's very hard to look backward to explain this. It could be as simple as one big operator coming in and saying, I want to be in this stock. Word spreads around. Remisiers have pretty much been at their desk swatting flies for the past few years. Anything that pops up with decent volume, decent price range, the phones will start ringing again," CMC market analyst Nicholas Teo said.

A senior stock analyst, who declined to be named because of sensitivities surrounding discussing certain specific stocks, added: "I don't think it's fundamentally driven. The market has been in such doldrums that punters who were looking for something to trade were ready to jump on this. I think it's a short-term phenomenon."

Mr Teo, however, was hopeful that the rally could run on a little longer.

"I hope it's the onset of a nice run," Mr Teo said. "I think it's due because the markets here have been really quiet. The penny market has been really quiet since the Blumont saga (in October 2013). That really was the biggest crippling force."

Mr Teo said that credit departments at the various brokers do not appear to be close to imposing restrictions.

"Right now the frenzy is by no means excessive because the multiplier is just starting to build," he said.

But the senior stock analyst was more wary, given that the fundamentals did not appear to justify some of the fast-rising stocks from the past week. "If you see a collapse in one or two of these counters, the rest will follow suit."

The analyst did not believe that there was a significant risk at the moment of a major crisis if some of the recent penny run-ups lost steam, given that the current rally has only just begun, and that most of the gainers over the week had very small market capitalisations.

The broader market, however, could face some rerating amid a slowing economy.

"There is some concern about wider market risk," the analyst said. "If you look at Singapore earnings, it's been disappointing for a while. I wouldn't be surprised if there are more downgrades to earnings."