PETALING JAYA: The risk appetite of investors appear to have increased in recent months as small-cap stocks on Bursa Malaysia are once again in the limelight.
In search of higher returns, investors are buying into third-liner stocks, banking on recovery play and beaten-down valuations.
Year-to-date, the FBM Small Cap Index has outperformed the benchmark FBM KLCI, rising by 6.4% and 0.87% respectively.
FBM Small Cap Index comprises 212 stocks with net market capitalisation ranging from RM15mil to RM1.69bil, according to FTSE Russell’s data.
Speaking with StarBiz, Rakuten Trade head of equity sales Vincent Lau expects the outperformance to continue.
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“Investors flock to small-cap stocks as they offer more upside, compared to large-caps. In addition, their corporate earnings are also expected to improve in the coming quarters, hence boosting sentiment,” he said.
Lau highlighted that improving investor sentiment within the blue chips has trickled down to stocks with smaller market value.
“The return of foreign investors into large-cap stocks has boosted the sentiment in the local market. This positive sentiment has flowed into the small-caps, with retail investors acting on this positive sentiment to go into small-caps,” he said yesterday.
Based on the data compiled by MIDF Research, international funds have been net buyers on Bursa Malaysia for 12 out of the first 15 weeks of 2022.
Cumulatively, a net foreign fund inflow of RM6.91bil has been recorded year-to-date up till April 15.
In the same period, local institutions are net sellers to the tune of RM7.5bil, while local retailers have been net buyers at RM588.2mil.
Lau pointed out that investors are increasing their exposure in small-cap stocks on the back of reopening of the economy and international borders.
“Stocks in the technology sector and those related to the recovery theme would perform stronger, moving forward. Consumer-related stocks, which have been benefiting from the economic reopening, should also perform better. Meanwhile, sectors that were laggards previously like plantation and construction would be in investors’ radar,” he added.
Fortress Capital Asset Management chief executive officer Thomas Yong said the outperformance of FBM Small Cap Index year-to-date was due to investors looking for companies with higher corporate earnings growth.
“FBM KLCI index components largely consist of blue chips that might not offer attractive growth potential. Going forward, investors might continue to hunt for small-cap companies to look for higher returns,” he told StarBiz.
Yong, however, noted that the economy is still in the early phase of recovery.
He also said market sentiment is somewhat affected by the ongoing geopolitical tensions as well as the hawkishness of central banks globally.
“It really depends on investors’ risk appetite when deciding whether to stick with big caps or shift towards higher-risk small caps with potentially higher returns.
“Investors should also bear in mind that some of the small caps could be quite illiquid,” he said.
Globally, market sentiment has been affected by the Russian invasion of Ukraine, which began in late February. With both Russia and Ukraine being important commodity suppliers internationally, the conflict has raised concerns on whether the global economy could grow at the rate expected before.
The International Monetary Fund recently said it will revise downward the economic growth forecast for 2022, on the back of global challenges. Managing director Kristalina Georgieva said that the world is facing “a crisis on top of a crisis.”
Amid the challenges, central banks globally are looking at raising their interest rates as inflation rears its ugly head again. Higher rates are usually seen as negative or less accommodating for the stock market.
Fortress Capital Asset Management chief executive officer Thomas Yong said the outperformance of FBM Small Cap Index year-to-date was due to investors looking for companies with higher corporate earnings growth.
Risks aside, Yong said investors should seek exposure in sectors that would benefit from the economy’s reopening and recovery.
Sectors such as food and beverage, tourism-related as well as retail are some of the sectors that will see a much-awaited recovery, he added.
“The other sector that might be attractive is the technology sector after the recent share price corrections.
“After all, some of these stocks are exposed to the secular growth trend of the technology industry that looks likely to continue to command a high demand over the next few years,” he said.
As small-cap stocks are once again attracting investors’ attention, CGS-CIMB Research pointed out that the key appeal of small caps is their strong growth prospects, especially in “undiscovered stocks.”
In a note issued yesterday, the brokerage attributed the improved performance of small-cap stocks to the recent launch of the Bursa Rise scheme to raise trading velocity.
“We maintain our positive stance on Malaysia’s small-cap sector as we are of the view that there are many undiscovered growth stocks that offer higher earnings growth than the FBM KLCI earnings.
“Our top three picks are Bonia Corp Bhd, Berjaya Food Bhd and Media Prima Bhd,” it said.
On April 12 to 13, CGS-CIMB Research hosted its fourth Virtual Malaysia Small-and Mid-Cap Corporate Access Day, featuring 15 small- and mid-cap companies.
“We received good response for the virtual event, attracting 148 clients,” it said.
CGS-CIMB Research noted that most companies are optimistic about near-term prospects, especially due to the low-base effect caused by the Covid-19 impact and lockdown measures over the past two years.
“Most expect stronger sales, driven by border reopening and improvement in economic activities after lockdown measures were lifted in the fourth quarter of 2021.
“Key concerns are rising costs - driven by the minimum wage hike, higher commodity prices, rising freight charges and labour shortages.
“Companies plan to mitigate these by raising selling prices, having more focus on improving operating efficiency and better economies of scale,” according to the research house.