Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on February 26, 2018

KUALA LUMPUR: The heavyweight blue chips seem to have kick-started the next leg of the rally on the local stock market. And the mid- and small-cap counters are likely to join the party later to continue sustaining the momentum, barring any unforeseen circumstances.

A third of the FBM KLCI stocks are currently trading at or near their record highs. This month alone, more than 20% of the benchmark index’s 30 counters hit all-time highs when the market resumed its strong run-up following a correction at the beginning of the month due to the sharp drop on Wall Street.

Across the board on Bursa Malaysia, 49 companies were trading at or near their all-time highs last Friday, and 36 of them have a market capitalisation of RM1 billion and above.

Malayan Banking Bhd, the largest by market capitalisation, touched its all-time high of RM10.26 that day, while Nestle (M) Bhd, the most expensive stock on the exchange in terms of absolute price, hit a fresh high of RM123. Public Bank Bhd, whose market capitalisation is the third largest on Bursa, also climbed to all-time high of RM22.80.  PPB Group Bhd touched a new high of RM17.76 last Wednesday, before pulling back slightly to RM17.68 last Friday. Likewise, Hong Leong Financial Group Bhd and Hong Leong Bank Bhd were both trading at their all-time highs at the beginning of the month.

The 3.6% gain on the FBM KLCI so far this year is the strongest for the January to February period since 2007 — the year before the onset of the global financial crisis — when it recorded a 9.1% gain. The gain could have been sharper if not for the correction caused by the big drop on Wall Street early in the month. In January, the index had gone up 3.99%, its eighth-highest monthly increase in the last 10 years.

The upward trend on Bursa is not just among the component stocks of the FBM KLCI. A quick look at the 182 listed companies with a market capitalisation of more than RM1 billion showed that more than a fifth of them — 41 companies — touched their all-time highs as recently as this year. They included Dutch Lady Milk Industries Bhd, Top Glove Corp Bhd, Bursa Malaysia Bhd, Heineken Malaysia Bhd, Carlsberg Brewery Malaysia Bhd, AirAsia Bhd and George Kent (M) Bhd.

Areca Capital Sdn Bhd chief executive officer Danny Wong told The Edge Financial Daily that the gains among the big-cap stocks is a normal phenomenon. A rally in the equity market is usually led by the big-caps, followed by the small- and mid-caps eventually, according to him. “The initial stage of the rally will be led by the big-caps mainly because the [local] institutional investors and foreign funds come into the market. The rotation among the small-caps will follow suit as more positive news flow emerges,” Wong said. He noticed that investors’ risk appetite has returned after the selldown at the start of the month.

The rally isn’t only on Bursa as markets elsewhere also headed up. Singapore’s Straits Time Index has gone up 3.83% year to date (YTD) to 3,533.22, which is not that far from its highest peak of 3,831.19 achieved in 2007. The Jakarta Composite Index has also gained 4.2% YTD to 6,619.804 after hitting its all-time high of 6,689.287 two weeks ago. In the US, the Dow Jones Industrial Average also resumed its upswing to reach 24,962.48 after a correction in early February upon hitting an all-time high of 26,616.71.

 

Small-cap stocks to catch up

In contrast, the FBM Small Cap Index dip by 0.13% YTD, reflecting the lack of interest in small-cap counters. But these stocks are expected to take the center stage later should the positive sentiment prevail.

Vincent Lau, Rakuten Trade Sdn Bhd vice-president of research, said that a rotation into the bigger-cap players was seen at the beginning of this year, as reflected by the five-week correction seen among the small-cap players since Jan 9. “With the foreign investors buying in, the (FBM) KLCI has been on a strong uptrend. The smaller-cap has seen some corrections, probably after the run-up seen in the last two to three years. But with the bullish sentiment expected to continue ahead of the upcoming 14th general election (GE14) as well as the better earnings results, it is likely for the small-cap players to catch up,” Lau said. He noted that the big-cap stocks have done well but reckoned that there are buckets of opportunities in the small-cap space, which has largely been ignored by the foreign funds so far.

Meanwhile, based on the readings of the technical charts, RHB Retail Research commented last week that the bullish indicator had emerged suggesting that the FBM Small Cap Index will see more upside movements.

Areca Capital’s Wong concurs that small- and mid-cap players will catch up with the bigger-cap players as the positive sentiment continues. “The small- and mid-cap companies usually react more quickly to the positive news flow and development than the bigger-cap players,” he noted.

 

Is the market too far ahead of fundamentals?

With the benchmark index not too far from its historical highest point and the big-cap stocks at record highs, it has prompted the investing fraternity to ponder whether the local market has reached its peak? Should investors jump on board before the bullet train embarks on the next leg of the rally? The fear of missing out is rising as the index heads further north. A look at the stock market valuation shows that the FBM KLCI is trading at a trailing price-earnings ratio of 17 times, which is in line with its five-year average although it is slightly higher than its 10-year average of 16.6 times. The FBM Emas Index, comprising large- and mid-cap constituents of the FBM 100 Index and FBM Small Cap Index, however was trading at a trailing PER of 18.6 times, which is higher than its five-year and 10-year average of 17.5 times and 16.2 times respectively.

Wong pointed that the benchmark index does not look cheap now with high expectations of a stronger earnings to be seen for the upcoming results reporting season for the fourth quarter ended Dec 31, 2017 (4Q17), considering the robust economic growth in 2017. “It’s [valuation] not cheap but if the earnings in 4Q17 (fourth quarter 2017) and 1Q18 met expectations, it will be supportive of the market ... If not, then it’ll be difficult for the momentum to continue given the [rather high] valuation of the (FBM) KLCI at the moment,” Wong commented.

Wong pointed that most of the banking companies have yet to announce their results except for Public Bank, which has edged slightly higher, and with banks’ dominance in the FBM KLCI, it will be crucial for the results of the banking sector to perform to maintain the rally seen in the index.  He noted that plantations have done relatively well and some of the blue-chip consumer stocks have seen a surge in earnings.

Apart from the upcoming GE14 and external risks, analysts opine that corporate earnings are the one factor that will dictate the market direction given that the market have priced in quite decent growth.

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