Graphic By TMR

Malaysia’s large-cap segment, as represented by the FTSE Bursa Malaysia (FBM) KLCI Index, has suffered from policy uncertainty on the domestic front with investors finding more value and investment opportunities within the local small-cap segment.

The trade conflicts between the US and China, and change in the local political landscape brought uncertainty and led to a significant sell-off in the local small-cap segment in 2018 (-32.2%).

The government’s decision to put several mega construction projects on hold or review in an effort to restructure its budget and finances led investors to discount a huge drop in revenues and profit margins, and sparked a sell-off in construction related companies.

In contrast to the large-cap segment, the small-cap segment on Bursa Malaysia is dominated by many manufacturing and industrial players that are trade-oriented. The expectation of a global recovery in trade and aggregate demand has helped fuel a recovery within the small-cap segment, which helps explain the divergence in performance between the large-cap and small-cap segments.

Within the small-cap universe, there are interesting investment opportunities within the construction and technology sectors.

The government has announced the continuation of some of the construction projects like the Light Rail Transit Line 3 in February, followed by the resumption of Bandar Malaysia and East Coast Rail Link projects this month.

Market participants and investors who had previously slashed their earnings estimates are now looking to readjust expectations on these positive developments.

Putrajaya has also issued RM7.3 billion worth of Samurai Bond in March 2019 to fund these projects.

The issuance of yen-denominated bonds serves as a feasible funding facility and would allow the government to service cheaper loans compared to issuing Malaysian Government Securities.

The urbanisation initiatives and infrastructure development could provide important support to the domestic economy moving forward.

On the technology front, we believe the technology investment theme remains intact and attractive for the long term.

As industrial players and manufacturers enhance efficiency and increase productivity through automation, consumers are adopting innovative technologies and smart systems (Internet of Things) at an accelerated pace to improve their daily lives.

The adoptation of technologies requires the empowerment from both hardware and software to allow smart devices to “communicate” with one another.

Hence, the increased demand for technology could help drive top-line growth for the hardware manufacturers and software vendors, which predominantly resides within the local small-cap segment.

The 5G initiatives on both foreign and domestic fronts could also drive demand and revenues for local technology companies.

For investors who would like to tap into the growth opportunities within the local small-cap segment, they may want to look to add exposure via their supplementary portfolios but should allocate no more than 20% of their equity budget to this segment.