PETALING JAYA: Despite the unfavourable short-term outlook, there are still pockets of opportunity for investors who are interested in small-cap stocks.
Optimism in the market remains with the high vaccination rate and as the economy continues on its recovery path, which would enable investors to benefit from a sector rotational play and a meticulous stock-picking strategy.
In a recent report, RHB Research advocated several key investment themes including exporters, value stocks and election play.
Against this backdrop, the brokerage recommended consumer discretionary, technology, logistics, oil and gas (O&G), commodity play, and politically-linked thematic play as sectors to look out for in the small-to-mid caps space.
It noted that accommodative fiscal and monetary policies should continue to lend support to private consumption, supporting the consumer discretionary sector.
Meanwhile, the O&G sector is likely to draw interest, premised on the high crude oil price trend, higher capex allocation and oil demand recovery.
The technology space will also remain in favour thanks to its structural growth and strong fundamentals.
However, RHB said it is paramount that investors remain selective on technology companies with a strong track record and competitive edge to sustain the elevated valuations and weather through a potential valuation-derating, on the back of persistent high inflation rates and the rising interest rate environment.
As for the logistics sector, growth will continue on improving trade and volume following the reopening and resumption of economic activities.
Additionally, secular e-commerce play, elevated freight rates, growing demand for third-party logistics, and favourable measures and tax incentives from policy makers bode well for the industry.
The imminent general election could also see politically-linked stocks gain prominence, with improved sentiment and the resumption of contract flows.
“With the FBM 70 Index and FBM Small Cap Index’s current forward price-earnings ratios (P/E) having retraced to below their five-year mean levels, and the indices are now trading at two times to three times P/E discounts to that of the FBM KLCI – based on RHB’s coverage universe – it is still paramount for investors to exercise extra diligence in their stock-picking, despite a better risk-reward ratio in terms of the relative forward valuation,” RHB said.
It also highlighted that valuation for the MSCI Malaysia Small Cap Index continued to be at the north of the MSCI benchmark index.
This is mostly owing to the superb performance of many stocks in the small-cap space, especially the high-flying technology stocks that command premium valuations, even in the region.
Nonetheless, the research house cautioned that the prolonged pandemic, political instability, earnings disappointment, worsening economic conditions, liquidity issues and higher environmental, social and governance-related risks could curb potential gains in the small-cap space.