Dim outlook for small-cap companies this year, says Fundsupermart

A number of factors could hinder the growth prospects of the smaller listed companies


Small-cap stocks on Bursa Malaysia may have a dimmer outlook this year despite expectations of a synchronised global economy growth, according to Fundsupermart.com.

The unit trust distribution channel noted there are a number of factors that could hinder the growth prospects of the smaller listed companies.

It said the exporting sector is likely to face the negative consequences of a strengthening ringgit — with plenty of mid-to small- cap companies falling under this category.

The local unit strengthened by more than 10% against the US dollar, making it the second-best performing currency in Asia last year.

“Even if we assume the ringgit to stabilise at the current level (RM3.90 against US dollar), we would see an appreciation of close to 10% for the ringgit on a year-on-year (YoY) basis in 2018. In fact, the stronger ringgit poises to contribute to the decline in profits for the exporters and hinder the earnings growth of these players,” Jerry Lee Chee Yeong, an analyst at Fundsupermart noted in a recent report last week.

Fundsupermart also noted the return of foreign fund into the local equity market as one of the possible hindrance for the growth of small- cap companies.

“This led to the outperformance of the big caps against the small caps on year-to-date (YTD) basis. We foresee the continuing foreign fund inflow to lift the performance of the big-cap segment as foreign investors will usually focus on those big-cap companies that they are more familiar with,” Lee added.


The local unit strengthened by more than 10% against the uS dollar, making it the 2nd-best performing currency in Asia in 2017 (Pic: Boomberg)

As at Feb 2, 2018, the Malaysian equity market had posted five consecutive weeks of foreign fund inflows with foreign investors buying up to RM3.5 billion on YTD basis.

The rising fund inflow is a reflection to the improving fundamental for the local economy and the recovering corporate earnings.

The unit trust fund marketing platform also said undervaluation of the ringgit could possibly boost foreign fund inflow.

“Reason being, if the ringgit were to further appreciate moving for- ward, it would translate into a higher total return for the foreign investors due to the currency translation gain — so, a better economic fundamental coupled with the potential upside for ringgit would be a strong catalyst for the inflow of foreign fund,” Lee added. Meanwhile, the markets are also expected to see an increase in volatility, due to the reduction of excess liquidity in the financial market.

“We expect more central banks to follow the move toward normalisation of monetary policy. As such, investors might find it even tougher to hand-pick small-cap companies during this rising volatile environment, especially after three years of outperformance against the big-cap segment which lifted the valuation of small-cap companies to a relatively higher level,” Lee said.

Fundsupermart, however, remains positive on the big-cap segment as they believe that the strong macro-economic outlook is likely to support the earnings growth for small-cap stocks.