Market selldown short-lived
Small-cap stocks see sharp drop but recover much of their losses
PETALING JAYA: The sudden selldown in small-cap stocks in the first part of the trading session was short-lived.
Persistent concerns on valuations of a number of small counters caused some jittery investors to take some money off the table, souring sentiment on the broader market.
When trading resumed in the afternoon session, the selldown on small caps seemed to have abated, and some of the stocks that had experienced big declines bounced back from their day’s lows.
Some other stocks which had also seen steep losses in the morning session recouped some of these losses and ended the day only with marginal losses.
“There was a heavy selldown in the morning session, but this seems to have mostly dissipated in the second half of the day with a concerted effort seen to buy back into these sold-down counters,” Pong Teng Siew, head of research at Inter-Pacific Securities, told StarBiz.
The sudden drop in these stocks, for no apparent reason, had caught traders unaware and market chatter was that some traders had to fill in their margin calls from stocks which were initially heavily sold down on late Monday, thus the cascading effect on the broader stock market that was carried on to yesterday.
“Some of these traders needed to quickly close their positions to fulfil their margin calls on stocks that had fallen swiftly,” a broker said.
Small-cap stocks dominated the most-active list in yesterday’s trading session and that included stocks such as Frontken Corp Bhd, Dagang NeXchange Bhd, Aemulus Holdings Bhd and Kronologi Asia Bhd.
The market closed the day mostly lower, with losers largely outpacing gainers on a 2.23 times ratio, while the benchmark FBM KLCI was largely stable and held its ground throughout the day in spite of the turbulence elsewhere.
The 30-component stock FBM KLCI posted a gain of 0.21% or a 3.74-point addition instead to end the day higher at 1,781.65 points.
Analysts still viewed the KLCI levels as being undervalued as compared with the regional performance, and that the local market had further room to catch up with its global and Asian peers.
Elsewhere in the United States, markets continued to hit record levels with the 30-stock Dow Jones Industrial Average posting its ninth consecutive record close rising by 25.61 points to close at 22,118.42 when the trading session closed.
The S&P 500 rose 0.16% to close at 2,480.91, while the Nasdaq Composite added 0.51% to close at 6,383.77.
The present view among analysts is generally mixed on whether small-cap stocks are truly fully valued on a historical and forward perspective.
“These concerns of high valuations are not new. Some have decided to take some money off the table to realise some of their gains first,” said a broker with a local investment bank.
“It feels as though we are just coming out of this dark period of uncertain economic growth globally and stocks are accurately reflecting this sentiment. This is why valuations have been rising in the recent past,” the broker added.
In a similar vein, Areca Capital’s chief executive officer Danny Wong said it was difficult to say if small-cap counters had overstretched their valuations as of now, and that the earnings report for the second quarter would be key.
“If a selected few key stocks (like those in the technology sector) see a very positive earnings report, then prices could go up further as valuations would have dropped. These small-caps are usually very sensitive to their earnings reports. Last year’s end and the first quarter of 2017 have seen good earnings recovery,” Wong said.
“If in the second quarter this uptrend is sustained, then people would take it that the recovery is genuine and that it is a U-shaped recovery. Thus, there would be three consecutive quarters of uptrend and the market would ascribe growth valuations to these counters. The market will read this as a recovery and there will be a risk on mode with a higher price-to-earnings ratio even without real numbers coming in,” he added.