Bad year for big caps
A flat return is considered an outperformance
THIS has been the year big caps and blue chips performed badly.
If you made a bet on a big cap this year, chances are you would have lost money. A flat return would have been an outperformance.
For those who felt that blue chips were the safe haven, a confluence of reasons such as the change in the political landscape, more competition coming in and a global shift in trends have caused many of the big caps to record significant drops.
The close of the recent third quarter earnings season by Corporate Malaysia also surprised many brokers and many are now pricing in a slower earnings growth momentum moving forward.
Corporate earnings for the third quarter fell 5.9% year-onyear, due to weaker performances from the agribusiness, construction, oil and gas, and gaming sectors.
This was the year stocks like Telekom Malaysia Bhd (TM), Axiata Group Bhd, Astro Malaysia Holdings Bhd, Genting Malaysia Bhd, Bumi Armada Bhd and many others were humbled.
You see, sentiment matters, as stocks trade between the gap of potential and reality.
When sentiment is bad, such as when there’s an ongoing global trade war, the new Malaysian government cleaning up excesses, and bad third quarter results to contend with, there is a far higher chance that stocks with high price earnings ratios (PERs) will go down even if the earnings outlook remains intact.
Blue chips and big cap stocks in Malaysia have never been riskier, not just because of the change in government and sentiment, but mainly because most of them were trading at very rich valuations to begin with. Many big caps which have been heavily sold down are now trading at way more palatable valuations.
“IHH Healthcare Bhd is still trading at a PER of 50 times. Who’s to say it won’t fall further if the market sentiment does not pick up,” remarks one fund manager.
“People have the misconception that investing in blue chips are safer in a bad market. Sure, it is easier to sell out of big caps because they have more liquidity. Nonetheless, upside is definitely lower. Fund managers or investors who buy big caps want something more stable and safe – so they are happy with a stable return of some 7% to 8%. However, because big caps are already big and established, and more often than not overvalued, its growth potential is limited,” says an investment banker.
“So this return of 7% to 8% is only good when the market is good. In a bad year when the sentiment is down or the business experiences a contraction, the stock can fall by some 20%,” he says.
One fund manager laments that his portfolio is down because of the big blues.
“At least Maybank is holding steady (up 7.9% on a year-to-date or YTD basis) and Lotte Chemical Titan Bhd is flat (up 1.5% YTD). Just not losing money is a good thing this year,” he says.
Rakuten Trade Sdn Bhd vice-president of research Vincent Lau says there are enough small and mid caps out there with good growth potential and offer far superior capital gains compared to the big caps.
“While it is true that small and mid caps tend to have less visibility partially because they are not well covered by both the investment community and the media, this can present an opportunity because there is probably a divide between the stock price and its fundamentals. This offers the investor to buy the stock at a discount,” says Lau.
He acknowledges that small caps can be illiquid, meaning it will be hard to get out once an investor takes a position.
However, as more analysts give coverage to the stock, and if the company really delivers on its rev- enues and numbers, demand for the stock can really rise.
Big caps not so blue
Many heavyweights of the FBM KLCI have had a trying 2018.
TM for instance has seen its market capitalisation slashed by half over the past six months. Some analysts opine that its name could be excluded as a constituent stock of the FBM KLCI by the end of this year.
TM has been experiencing lower earnings and faces increasing regulatory and competitive pressures. It has also revised its dividend policy down to 40% to 60% from its previous 90% of profit after tax and minority interest.
MIDF Research points out that operating expenses have also been on the rise, with cost as a percentage of revenue increasing steadily to around 90%.
“Due to the earnings pressure and the group’s capex commitment for long-term growth, we expect dividend payment to decline as well. All factors considered, we are reiterating our Sell recommendation on the stock,” said MIDF Research in its note dated Nov 27.
Meanwhile, if an investor bought CIMB Group Holdings Bhd, it’s been a roller coaster ride, although this is mainly triggered by the change in the political tide.
On a 52-week basis, the share price has traded between RM5.21 to RM7.39.
However on a year-to-date basis, the share price is pretty much ending where it began with, and is down some 0.17% at its price of RM5.79.