By Rhys Jones and Ben Deighton (Reuters)
British small caps are braced for a tough end to the year after a challenging third quarter saw the FTSE small cap index shed 10 percent of its value compared to the FTSE All Share Index's 6 percent fall.
With numerous profit warnings, delistings, a lack of funding and waning investor confidence, the downturn has not been kind to small caps — a situation that is unlikely to change in the fourth quarter.
The financial services industry has been one of the worst hit with the FTSE All Share general financials index shedding a third of its value so far this year as the credit crunch continues to impact on liquidity.
With banks of all sizes looking to cut the debt on their balance sheets, more financial sector casualties could be around the corner, said Arden Partners analyst Sarah Spikes, who believes cash rich, well managed firms with strong dividend yields will ultimately take market share.
"We highlight Brewin Dolphin and Hansard Global (as winners)," said Spikes.
While the banking crisis has left Britain on the brink of recession, its impact has also been felt on high streets up and down the country.
The FTSE All Share general retailers index has lost around a third of its value since the start of 2008 as Britons curb spending as living costs rise.
With consumers likely to rein in spending in the run up to Christmas, many smaller retailers look set to suffer further, especially those selling products tied to the housing market.
"Home related purchases are likely to suffer most so we would be especially concerned for Land of Leather," said Shore Capital retail analyst, John Stevenson.
The struggling sofa chain, which has issued three profit warnings this year, last week reported an 87 percent fall in annual profit as shoppers cut back on big ticket purchases.
Although in-store sales are declining, online retail sales continue to rise as growing broadband penetration makes Internet shopping easier. Stevenson believes online fashion firm ASOS and baby goods retailer Mothercare stand out from the crowd.
PROPERTY
While the outlook for Britain's small retailers is poor, short-term prospects for the property sector are even worse, according to Roger Hardman, head of research at Hardman & Co.
"The fourth quarter outlook for virtually the entire sector is abysmal. The indications are that both volumes and prices of houses and flats will fall further," said Hardman, who recommends defensive firms such as Alumasc, a building materials group, which is sheltered by its government contracts for the schools rebuilding programme.
In contrast to the property segment, the technology sector has held up well in recent months, with the FTSE All Share technology, hardware and equipment index rising by around 1.5 percent in the third quarter.
Analysts see technology companies linked to government spending performing well over the coming quarter.
"The UK government will keep spending on education and health so I see IT service providers such as System C Healthcare and RM doing well," said Shore's Rob Speakman.
MINERS
Small cap miners had a difficult third quarter as spiralling fuel and operating costs took their toll, wiping 35 percent off the value of the FTSE All Share mining index during the period.
In September, AIM-listed Serabi Mining shed over three quarters of its value after output at its flagship Brazilian mine fell below target, forcing the gold miner to halt production at the mine and mull its strategic options.
Analysts predict that many small pre-production miners who are not cash-rich could struggle in the fourth quarter.
"Cash poor small cap miners that haven't started production will invariably have to come back to the market at some point," said Ambrian mining analyst Nick Mellor, who believes Centamin Egypt and Kalahari Resources could succeed because "both have improving assets, good stories and are attractive takeover targets."
However, with gold and platinum prices rising as demand for precious metals soars in the wake of the global stock market crash, small cap miners could yet emerge unscathed from what has been a tough 2008.
