The pre-election period has not been friendly to small- and mid- capitalised companies with the FBM SCI down by over 18%

By DASHVEENJIT KAUR / Pic By MUHD AMIN NAHARUL

The smart money for the second half of the year could very likely be in small-cap stocks as investor interest is expected to shift there, once the political risk subsides post 14th General Election (GE14).

The pre-election period has not been friendly to small-and mid-capitalised companies on the local stock market with the FTSE Bursa Malaysia Small Cap Index (FBM SCI) down by over 18% year to date (YTD), as investor interest has been focused on big-cap government and politically linked counters, leading the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) to gain 3% YTD.

RHB Research Institute Sdn Bhd’s head of Malaysian research Alexander Chia strongly believes the sombre mood in small caps will be short-lived.

“One of the key reasons for the divergence in the stock market performance for the small-and big-capitalised companies is the perceived political risk amid the upcoming GE14,” Chia said.

Speaking at the the launch of “RHB Top Malaysia Small Cap Companies 20 Jewels 2018” book yesterday, he said most of the small- and mid-cap companies have a strong outlook on the back of good gross domestic product growth numbers and robust global trade.

“Once the risk of GE14 is behind us, we expect investors will refocus on small- and mid-cap companies, given their strong economic fundamentals.

“The time is right for investors to revisit the small-and mid-cap stocks after the election risk subsides,” he said.

Chia believes retail investors have stayed on the sidelines this year as institutional investors have sought refuge in large-caps, resulting in FBM KLCI outperforming the FBM SCI.

Highlighting on the handsome run the small-cap index has had for the past three years, Chia said the current selling is overdone and expects small- and mid-cap stocks to play catch up in 2H18. The small-cap index rose 16% year-on-year in 2017.

RHB’s base case assumption is for the incumbent government to retain a simple parliamentary majority.

“In the event of unexpected results, we do not foresee any immediate aftermath on the small- and mid-cap companies, but we have not priced in the possibility of an unprecedented victory,” Chia emphasised.

RHB foresees a trading market with a lot more volatility moving forward, with concerns remaining over external factors such as the potential trade war and action on monetary policy.

RHB Banking Group MD Datuk Khairussaleh Ramli said the volatility inherent in the small-cap stocks offers investors the opportunity to enhance the alpha in their respective portfolios to contribute towards the outperformance of their respective benchmarks.

“The opportunities presented in the small-cap space are huge, given there are 821 companies on the stock exchange, with a market capitalisation of below RM1 billion.

“RHB hopes to be able to identify the small-cap names that possess solid growth prospects to emerge as tomorrow’s mid- and large-cap companies,” Khairussaleh added.

Bursa Malaysia CEO Datuk Seri Tajuddin Atan who was also present at the launch highlighted the FBM SCI has grown by 68% since 2009.

He added that this segment of the stock market has enhanced better value recognition and vibrancy in the local bourse, as well as encouraged greater investor participation.

In RHB’s 14th edition of its “Top Malaysia Small Cap Companies book”, Sarawak Oil Palms Bhd was the largest stock with a valuation of RM2.1 billion, while the smallest with a market capitalisation of RM75 million was Nova MSC Bhd.

A total of 85% of the jewels listed in the book have a market capitalisation of less than RM1 billion.

The book features companies from 10 different industry segments, with the biggest representations coming from the construction and consumer sectors.