Small-cap companies to capitalise on economic downturn

In contrast to large caps, the small mid-cap space has offered investors a remarkable 27% gain versus -4.4% for FBM KLCI in 2019


SMALL-CAP companies involved in technology, industrial products and services sectors are poised to better capitalise on emerging opportunities from the recent downturn.

With the fate of many bigger companies tied to waning external demand, low commodity prices and dwindling capacity to spend locally, chances of finding winners in the new norm post-Covid-19 will be higher among smaller firms, said RHB Investment Bank Bhd (RHBIB).

“In contrast to large caps, the small mid-cap space offered investors a remarkable 27% gain versus -4.4% for FTSE Bursa Malaysia

KLCI (FBM KLCI) in 2019, although it is still off from its peak by a much wider margin, down 23% year-to- date (YTD),” said CEO Robert Huray at the 16th edition of the RHB Top 20 Malaysia Small Cap Companies Jewels 2020 Book virtual launch yesterday.

Huray noted global equity markets are currently experiencing one of the wildest swings in recent history, precipitated by the coronavirus pandemic, with major indices in the US such as the SPX plunging 34% between mid-February 2020 and March 2020, before rallying sharply since then, cutting its losses for the year to 12%.

While investors are constantly on the lookout to hunt down stocks that are leading the market, the task has become more daunting since FBM KLCI narrowed its YTD losses to 13% which ultimately raises the question of further upside potential for big liquid stocks, against the backdrop of heightened uncertainties.

“The clear disconnect between rising stock prices and a lack of future visibility on the economy and sustainable future earnings has lent an unsettled tone to the recent market rally.

“In ordinary times, macro indicators are critical factors in determining potential upside (or downside) to equities, but unfortunately, we are in an unprecedented era with market distortion peaks that are most probably biased by the massive liquidity injection across the global monetary authorities,” he added.

RHBIB head of regional equity research Alexander Chia said the firm is beginning to see value in the market in a longer-term perspective, despite the elevated risk environment as the result of Covid-19.

He said the book launch is well-timed as the company is seeing strong demand for alpha rich small-mid cap stocks that are resilient and can survive the ongoing turmoil.

Concurring with Chia, RHB Research Institute Sdn Bhd head of RHB Malaysia Small Cap Research Lee Meng Horng said uncertainties in the stock market this year have been further compounded by a series of adverse developments from the global Covid-19 pandemic, oil price collapse and political upheaval.

Both added that companies that made into Top 20 Malaysia Small Cap Companies Jewels 2020 Book have a market cap of below RM2 billion, from ten different industry segments with the biggest representation coming from the technology, industrial products and services sectors.

These 20 companies have an average market cap of RM551 million (or median market cap of RM381 million), encompassing stocks from 10 different sectors. Technology, industrial products and services feature prominently and make up about 45% of our picks.

Representatives from some of the top 20 companies namely Kumpulan Powernet Bhd, Omesti Bhd, Solarvest Holdings Bhd, SCGM Bhd, Gabungan AQRS Bhd, Radiant Globaltech Bhd were also present at the launch to share their success stories with participants.

The Top 20 is part of the larger RHB Regional Small Cap Compendium which annually lists stock investment ideas from its research teams in Malaysia, Indonesia, Singapore, and Thailand.

Meanwhile, Hong Leong Investment Bank Bhd in a note yesterday said tracking recent three-day 1,083 points pullback on the Dow Jones Industrial Average, the local sentiment is likely to remain cautious.

Following a 15.6% relief rally from 1,208 (March 19) trough, the investment bank believes the FBM KLCI could experience some degree of profit-taking (with key supports between 1,350 and 1,370) ahead of the ongoing reporting season, worries of the US-China conflict and second wave of coronavirus infections, coupled with US Federal Reserve chair Jerome Pow- ell’s bearish view on US economic outlook which is “both highly uncertain and subject to significant downside risks”.