Focus on value stocks in current challenging environment, RHB Research advises

by RUPINDER SINGH / pic by TMR FILE

RHB Investment Bank Bhd (RHB Research) is advising investors to focus on value stocks with a healthy cashflow generation and dividends that offer a compelling valuation that will grow and prevail under the current challenging environment, said.

In a research note today, analyst Lee Meng Horng pointed out that with the macroeconomic and domestic political scene seemingly reaching inflection points, the market may have more reasons to be less pessimistic, notwithstanding the prevailing challenges.

“At current below-mean valuation, investors should continue to position for 2023 searching for alpha ideas as we advocate the evergreen strategy of constructing a portfolio of strong risk-adjusted returns in the longer run.

“We believe value stocks should take centre stage in a quantitative tightening cycle, while keeping the sector rotational play in check as excessive valuation may draw profit-taking activities in the current environment. 

“Hence, we advocate investors to focus on value stocks with a healthy cashflow generation and dividends that offer a compelling valuation that will grow and prevail under the current challenging environment,” Lee wrote. 

He said a reasonable valuation would, in turn, serve as a buffer should there be any miss in earnings forecast due to the uncertain overall macroeconomic.

“Our ideas are focused on domestic-centric businesses, unique turnarounds, event-driven catalysts and inelastic demand at low prevailing valuations,” he said.

Among the sectors RHB Research favours include consumer staples, consumer discretionary, healthcare, technology, logistics and oil and gas (O&G).

Lee said accommodative fiscal and monetary policies should continue to lend support to private consumption, supporting the consumer discretionary sector.

Meanwhile, he said, the O&G sector upcycle may continue with the higher capital expenditure (capex) allocation and floating production storage and offloading (FPSO) demand, which should translate to a positive earnings cycle.

He also remarked that selective value buys within the technology space should do well in a relatively less demand-susceptible subsegment. 

The logistics sector, on the other hand, should continue to benefit from elevated freight rates, growing demand for third-party logistics services and favourable tax incentives from policymakers, he added. 

2022 Small-Cap Jewels: Performance Review

Lee noted that RHB Top 20 Malaysia Small Cap Companies Jewels 2022 outperformed the broader market with a value-weighted holding period return of 20%, since its book launch on May 12, compared to the returns of benchmarking indexes namely the FTSE Bursa Malaysia KLCI (FBM KLCI), FBM 70 and FBM SC which was lower by 5.7%, 2.7% and 5.9%, respectively.

This was despite the extremely volatile market, as investor sentiment was rocked by weakening demand, rapid rises in interest rates, stubbornly high inflation, strength in the US dollar, protracted lockdowns in China and geopolitical crises.

“Overall, our 2022 picks outshone the market indices (in terms of the) value-weighted return, equal-weighted return or price-weighted return. 

“There were 10 gainers and 10 losers, with stocks from the O&G sector making up the majority of winners, due to elevated crude oil prices as a result of the geopolitical conflict, supported by robust FPSO demand and higher capex spending,” added Lee.