Better valuations for small-cap stocks, but financial determines rise or fall

Effective March, stamp duty for the trading of 361 counters on Bursa Malaysia will be waived for 3 years


The small- and mid-cap listed companies which have been identified for the stamp-duty waiver, could find renewed interest and improved valuations, but financial performance will determine how far these counters will rise.

Effective next month, the stamp duty for the trading of 361 counters on Bursa Malaysia Securities Bhd will be waived for three years.

Rakuten Trade Sdn Bhd VP for research Vincent Lau said the stamp-duty waiver is expected to attract more participation and trading velocity, resulting in higher value for the respective counters.

“More liquidity and spotlight on small-and mid-cap stocks would allow price discovery among many gems in this category and narrow the valuation gap, translating to a higher market capitalisation,” Lau told The Malaysian Reserve (TMR).

The incentives to remove the stamp duty aims to inject more interest in the smaller companies and boost the retail participation in the equity market. Retail investors participation has been muted since the Asian financial crisis of 1997/98. Efforts to boost their return include changing the trading lot size from 1,000 share to 100 share and lower brokerage rates for online trading have boosted interest.

At the same time, many of the smaller-listed firms are trailing their larger counterparts in term of valuations.

“The stamp-duty waiver is meant to provide more vibrancy in the market and bolster participation in small- and mid-cap stocks which have lagged behind the valuation of big-caps,” he said.

However, Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia said the freeze of stamp duty would unlikely have a material difference to investors as it accounts for a small portion of the total trading costs.

“Ultimately, people look at the overall quality of the listed company and the news flow generated when making trading decisions,” Chia told TMR.

“Investors do not focus so much on the trading costs unless they are a very active trader and speculator,” he said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the initiative is a long-term play to incentivise Malaysians to move into equities, but cautioned that this will not remove risks inherent in the market.

“We see this as positive development as it will encourage more Malaysians to consider investing in stock markets as a form of portfolio diversification rather than relying solely on risk-free assets,” Mohd Afzanizam told TMR.

“However, it will not eliminate the risks associated to stock investing, which is especially true in the case of small- and mid-cap stocks, which typically can be very volatile although it may offer lower entry price,” he said.

He said investment education is needed to provide the platform for the public to participate in the equity market.

“The notion of high risks and high returns should constantly be in the vocabulary for those who are contemplating to participate in the stock market,” he said

At the end of last year, the 361 listed companies that are to benefit from the stamp-duty waiver had market capitalisations ranging between RM200 million and RM2 billion, while eligibility from 2019 onwards will be based on the respective market capitalisations retained at the end of 2018. There are 978 companies listed on Bursa Malaysia today.

The initiative was among several announced by the government earlier this month to boost liquidity, and draw in more players to the local market.

This includes the opening up of intraday short selling to all investors and establishing a cross-border trading link between Malaysia and Singapore’s respective stock exchanges, which are slated for launches in the second quarter of this year and by year-end respectively.