This article first appeared in The Edge Financial Daily on April 9, 2018
KUALA LUMPUR: Investors of mid- and small-cap stocks have certainly seen the bears gaining strength. The continued mid- and small-cap rout that seemed to be gathering steam pressed the panic button last week.
The Bursa Malaysia Small-Cap Index, which features all the stocks listed on the Main Market except for the top 100 counters, has tumbled 18.4% year to date (YTD) to 13,908.16 points. The index has slid 21.5% in the past three months.
Small- and mid-cap counters are surely the selling targets. Over 20% fall in share price YTD is rather common among most mid- and small-cap counters.
However, investors whose portfolios are made up of the top 100 stocks (in terms of market capitalisation) on the local bourse have probably not panicked as yet.
In a sharp contrast, the FBM KLCI has gained 2.24% YTD to 1,837.01 points, the benchmark index is not that far from its all-time high of 1,876.87 points. The FTSE Bursa Malaysia Emas Index, which constitutes the top 100 biggest stocks, dropped only 1.28% YTD, indeed it fared better than Dow Jones Industrial Average that was down by 3.18%.
Two crude oil refiners were the apparent selling targets. Hengyuan Refining Co Bhd plunged 62% to eight-month low of RM6.87 last Thursday, before it rebounded to end the week at RM8.35 last Friday. Its peer Petron Malaysia Refining & Marketing Bhd lost 48.23% to a 10-month low of RM7.63 last Thursday. It closed at RM8.42 last Friday.
Semiconductor companies are the biggest victims of the trade war tension between the world’s two largest economies.
Based on last Thursday’s closings, companies that had also skidded include Globetronics Technology Bhd (-44.84% YTD), Unisem (M) Bhd (-36.17%), and Inari Amertron Bhd (-29.14%), just to name a few.
Malaysian Pacific Industries Bhd is currently trading at a trailing price-earnings ratio (PER) of 9.79 times, compared with its five-year average PER of 20.3 times.
This begs the question of whether the selldown of mid- and small-cap counters has gotten irrational. Have the fundamentals of all these companies changed much as both the US and China are flexing their muscles in the trade war, in addition to the political uncertainties at home?
According to investment analysts, the fundamentals of many industries in Malaysia remain sound, regardless of uncertainties surrounding the US-China trade war and the upcoming polls.
The rout since the start of the year provides opportunities for investors to bottom-fish, said some, but others warned of the risks too.
“What happened over the last week was this fear of a full-fledged trade war between the US and China, which will affect global trade. But I believe that both governments are rational enough not to engage in a trade war,” said Bernard Ching, head of research of AllianceDBS Research.
“The US knows that they would not want to derail the good economic performance the country has had over the last three years, because the economic recovery is still at an early stage,” he said.
US President Donald Trump started the tariff war by introducing 20% to 50% levy on imported washing machines and 30% on solar panels on Jan 22. On March 8, he slapped a 25% levy on imported steel and 10% on imported aluminium.
The matter escalated when Trump introduced a list of 1,333 imported items from China worth US$50 billion (RM193.5 billion) which will be slapped with import tariffs of 25%, on April 3. In a tit-for-tat move, China also pledged to impose tariffs on US aircraft, cars and soybeans.
Ivy Ng Lee Fang, head of Malaysia research and regional head of agribusiness research at CIMB Investment Bank Bhd, said that as both governments have flexed their muscles and showed what they can do to the detriment of the other, it is time for them to meet in the middle.
“The ball is in the US’ court to decide,” she said.
Sentiment turns cautious before poll
Apart from the intensifying trade tension between the US and China, sentiment on Bursa Malaysia is also affected by the upcoming 14th general election.
According to MIDF Amanah Investment Bank’s deputy head of research Mohd Redza Abdul Rahman, the local stock market has been underperforming its peers over the last few months as the political situation is heating up due to the imminent polls.
“This is similar to during the 13th general election when a few months before the election, the local stock market starkly underperformed its emerging Asean peers.
“The market does not like uncertainty, that is why the stock market has been underperforming, except for a while in the start of the year when it was playing catch-up to its peers,” said Mohd Redza last week.
Soon the Election Commission will announce the polling date.
Investors should assess their own risk appetite before making a decision on whether to invest now or to wait for the dust to settle later, said Ng.
“It really depends on the individual risk appetite. I wouldn’t advise people to go and buy aggressively because there are still a lot of uncertainties due to the general election and the Trump administration’s tariff war against China,” said Ng.