Small-cap stocks seen recovering post-GE14

RHB Research says current valuations offer buying opportunities

KUALA LUMPUR: Small-cap stocks in Malaysia will likely recover substantially post-14th general election (GE14), as concerns on domestic political risk dissipate.

According to RHB Research Institute head of Malaysia research Alexander Chia, investors’ interest into small-cap counters will return after the polls, underpinned by the stocks’ earnings growth potential.

Referring to the FBM Small Cap Index, he expects the index to trend higher by end2018, as compared to the current level.

Year-to-date, the FBM Small Cap Index has dropped by nearly 15% to 14,553.41 points. In comparison, the index has risen by 20.34% in the same period a year earlier.

Many small-cap stocks have generally taken a beating since January as investors switch to defensive blue chips ahead of GE14, driven by perceived domestic political risk.

Chia believes that the current valuations of small-cap stocks offer buying opportunities for the investors.

“After GE14, we expect investors to look for stocks which have been bashed down and offer superior earnings growth. Typically, we can expect small-cap stocks to offer bigger earnings growth versus the large-cap counters.

“We believe that the FBM Small Cap Index has retraced back to a more attractive level.

“The index is now close to the price-toearnings ratio mean of 10.9 times, which is the average of small-cap valuation since the 2009 Global Financial Crisis,” he told reporters after the launch of the RHB Top Malaysia Small Cap Companies 20 Jewels 2018 book.

On the potential impact from an electoral win by the opposition, Chia said that Malaysia’s capital market could see a broadbased correction which could last for over one week.

Predicting the incumbent government to retain a simple parliamentary majority, Chia said a “knee-jerk” sell-off could be expected if the opposition wins in GE14.

“I believe that the market has priced in an electoral win by the incumbent government. If we look at the foreign participation in Bursa Malaysia, foreign investors have been net buyers recently. Year-to-date, the net purchase by foreign investors is close to US$1bil.

“It is still early to tell the possible impacts if the election outcomes do not meet meet market expectations.

“We are currently in unchartered territories as Malaysia has not seen a change in government since independence,” he said.

Chia added that the country’s risk premium will spike if the opposition wins, as the market will react negatively to uncertainties.

However, he also pointed out that the market will eventually recover after an electoral win by the opposition, if the new government delivers its promises and provides good governance.

“This is because the economic fundamentals of the country will still be intact regardless of who is in charge politically,” said Chia.

Now in its 14th edition, RHB Investment Bank Bhd’s TopMalaysia Small Cap Companies 20 Jewels 2018 book features companies from 10 industry segments, with the biggest representation from the construction and consumer sectors.

With a market capitalisation of RM2.1bil, Sarawak Oil Palms Bhd is the largest cap stock in the book, while Nova MSC Bhd, with a market cap of RM75mil, is the smallest.

A total of 17 or 85% of the companies listed in the book have a market capitalisation size of less than RM1bil.