Small-cap stocks ripe for picking
Cheah Chor Sooi 

IF the performance of this year’s maiden initial public offering (IPO), Binasat Communications Bhd, can serve as a guide, small-cap stocks which have been in the doldrums for the past two years are poised to rebound or can expect some form of revival.

Against a backdrop of the recent FBM KLCI uptrend – which has a strong across-the-board spillover effect – the ACE Market  telco services provider ended its first trading day on Jan 8 with a commendable 28.3% or 13 sen gain to close at 59 sen.

Boosted by prospects of the 14th General Election (GE14) which must be held on or before Aug 24 – and a surge in foreign fund inflow (RM915.1 mil for the Jan 2-5 period which is the biggest weekly net inflow recorded since March 2017) – the benchmark KLCI has very much surprised market observers by its ability to hold steady above the psychological 1,800-mark.

Given Jan 11’s close of 1,816.88 points, the KLCI is only 4.187% or 79.35 points lower than its all-time high of 1,896.23 on July 8, 2014.

Such positive developments has inevitably boosted the FBM Small Cap Index (FBMSCAP) – the small-cap stock barometer – to climb to 17,704.12 on Jan 11 from 17,050.87 on Dec 29 for a gain of 653.25 points or 3.83%.

On Jan 8, the FBMSCAP breached the 18,000-mark to touch a new high of 18,230 before closing at 18,082.88 on that day. In so doing, the index has surpassed RHB Retail Research’s immediate resistance of 17,835 (the high of May 3) and critical resistance of 17,984 (the high of May 22).

For the record, the FBMSCAP hit its all-time high of 20,268.57 on March 31, 1997 while its second highest peak was 19,338.10 posted on Aug 19, 2014.

“Technically speaking, the index is on a positive roll, carrying forward Dec 2017’s encouraging momentum,” commented its technical analyst Rijel Sid. “Based on the current technical landscape, we opine that the upside movement has not reached its limit yet.”

However, the market entered into a consolidation phase over the next three trading days with the FBMSCAP plummeting to 17,704.12 (down 1.2% or 212.11 points) on Jan 11.

Given the negative read in Stochastic indicator, Maybank IB Research’s retail research chartist Nik Ihsan Raja Abdullah expects the FBMSCAP Index to retrace towards 17,700 and 17,506 in the near-term.

“The longer-term trend however remains bullish,” he reckoned. “Therefore, accumulate on weakness looks like a good strategy.”


Upward momentum intact

While the FBMSCAP has outperformed the benchmark KLCI last year by recording gains of 15.9% against 9.45%, MIDF Research head Mohd Redza Abdul Rahman advises investors to look at returns in 2016 whereby the FBMSCAP underperformed the KLCI with both indexes posting losses of -7.7% and -3% respectively.

“Judging from two years of return [2016-2017], the small caps have actually just caught up with the KLCI with two-year returns of 6.8% while the KLCI sees a two-year return of 6.6%,” he tells FocusM. “An interesting observation is that the first week of 2018 saw small-cap stocks rallying as much as 3.9% [as of Jan 5] which is much better than the KLCI’s gain of 1.2%.”

Moving forward, Redza opines that with the recovery of global oil prices, there could be some pick-up in trading activities among small-cap laggards on the upstream side.

“Additionally, property developers could also benefit, particularly those participating in the affordable housing market,” he suggests.

Rakuten Trade’s head of research Kenny Yee Shen Pin sees a bright prospect for small-cap stocks to shine, buoyed by the country’s strong economic fundamentals, global oil prices, strengthening of the ringgit and with the local bourse expected to play catch-up with its regional peers.

“Moreover, the pre-election rally will spill over to small-cap stocks, sparking excitement and more affordable avenues for retailers to enter the market,” he says. “Small-cap stocks can be meant for short-to-medium or even long term if identified correctly from the Main Market to the ACE Market.”

Rakuten Trade’s favourite and top pick is Straits Inter Logistics Bhd given its turnaround story with much growth potential and being the only listed bunkering company (laggard play among oil & gas counters).

Ultimately, while foreign funds tend to look at large-cap stocks with sufficient liquidity, small-cap stocks are capable of attracting both institutional investors and retailers, adds Yee.


Tracking small-cap stocks

THE FBM Small Cap Index (FBMSCAP) are made up of companies within the top 98% of Bursa Malaysia’s universe, excluding the constituents of the FBM KLCI and FBM Mid 70 Index.

According to the FTSE Monthly Report for December 2017, the 185-constituent FBMSCAP boasted a market capitalisation of RM56.74 bil as of end-December last year, up 12.6% from RM50.41 bil (with 168 constituents) six months earlier.

Aside from FBMSCAP, three other indices are worth mentioning when dealing with small cap stocks. They are:

FBM Fledgling Index: This index comprises Main Market companies which meet stated eligibility requirements, but are not in the top 98% by full market capitalisation and are not constituents of the FBM EMAS Index (as of Jan 11, the Fledgling Index has gained 4.5% to 19,360.6 from 18,524.94 on Dec 29).

FBM ACE Index: This index comprises all the companies listed on the ACE Market (as of Jan 11, the index has lost 0.42% to 6,865.2 from 6,893.97 on Dec 29).

FBM MidS Cap Index: This index comprises companies with full market capitalisation between RM200 mil and RM2 bil, and meet stated eligibility requirements (as of Jan 11, the index has gained 2.95% to 17,666.15 from 17,159.72 on Dec 29).

This article first appeared in Focus Malaysia Issue 267.