THERE are pockets of opportunity in the small mid-cap stock space despite the unfavourable short-term outlook, especially with the heightened expectation of volatility this year.
The fact that the sector is often preferred by retail investors due to perceived affordability and being more speculative in nature will continue to lend support – as long as retail participation remains robust, according to RHB Research.
“Again, we see strong interest in the small-cap space, thanks to the wide array of stock selection and bottom-up catalysts to move share prices,” opined analysts Lee Meng Horng and Loo Tungwye in a strategy note focusing on small mid-cap stocks.
“Trading activity for small-cap stocks continued to outperform the mid- and big-cap counters, evidenced by the 10% year-on-year (yoy) growth in year-to-date traded value.
“This was supported by healthy retail participation at circa 37% which more than offset foreign net outflows where foreign ownership dropped to a near-record low of 19%.”
In CY2021, the FBM Small Cap index (+1.3%) outperformed the FBM KLCI (-3.7%) as the main market remained weak in the absence of major positive catalysts with policies from the 12th Malaysia Plan (12MP) and Budget 2022 yet to provide a boost for the market.
Nevertheless, total turnovers (traded value) for FBM KLCI and FMB 70 were down 21% and 33% yoy despite the greater market volatility and a prolonged low interest rate environment.
“On a backdrop of weak market sentiment, trading volume was down to the wire in the 4Q 2021 with the securities average daily value (SADV) contracting by 47% yoy or 12% quarter-on-quarter, no thanks to the introduction of the Cukai Makmur (windfall tax) and stamp duty hike in the Budget 2022,” observed RHB Research.
“In the absence of clear catalysts, the market is likely to stay range-bound with a downside bias in the short term as suggested by technical readings.”
Looking ahead, the research house foresees value in the market, especially on the full-blown economic recovery expectations, supported by its in-house gross domestic product (GDP) growth forecast of 5.5% in 2022.
“However, the new COVID-19 variant could derail the growth path on top of escalating geopolitical risks,” opined RHB Research.
“Hence, we believe sector rotational play and a meticulous stock-picking strategy will triumph in such an environment. The key investment themes that we advocate include exporters, value stocks, and election play.”
Against this backdrop, the sectors to look out for in the small-mid caps space include consumer discretionary, technology, logistics, oil & gas (O&G), commodity play and politically-linked thematic play. – Jan 17, 2022
