KUALA LUMPUR: Global risk aversion, prolonged oil price rout, and volatile ringgit performance against major global currencies continued to dent investor sentiment. And these provide a terrible backdrop for small-capitalisation stocks.
Year to date the FBM Small Cap Index has underperformed the FBM KLCI, falling 3.6% while the benchmark index has gained 1%.
And analysts believe the worst of the small-cap decline is far from behind us over the near term, with uncertainty in what policies a Donald Trump presidency will use and a possible US interest rate hike this month.
JF Apex Securities Sdn Bhd head of research Lee Chung Cheng said unlike large-cap stocks which have the buying support of large institutional funds to hold up their prices, small-cap stocks are heavily dependent on retail investors who tend to be more easily spooked by a shock.
Additionally, Lee noted that the just-ended third-quarter 2016 reporting season continued to be another disappointing quarter for most small-cap companies.
He believes now is a good time to begin bargain hunting as small-cap stock prices have now fallen so far that they are starting to look attractive.
“Valuation-wise, the PE (price-earnings ratio) discount is quite steep, but [investors] must invest in fundamentally sound companies like those that are export-driven that will benefit from the local currency depreciation,” Lee told The Edge Financial Daily.
The FBM Small Cap Index fell to its lowest close in a year to 14,331.50 points on Nov 30, 2016 as Trump’s victory in the US presidential race has investors worried that things could get worse as the year goes on. The index was down over 11% from its recent high, on June 1, 2016, of 16,109.74 points. It closed 39.23 points or 0.27% higher at 14,460.43 last Friday.
The KLCI also ended the day up 2.52 points or 0.15% at 1,628.96 last Friday.
While small-cap stocks have regained some ground, analysts say the increase may not be enough to stage a rally over the near term.
According to Pheim Asset Management Sdn Bhd director of portfolio investment James Lau, the recent run in small-caps has made them pricey, suggesting that a technical rebound in the index would not last long.
“Some of the small-cap counters are richly priced. In fact, some investors have already realised their gains after they benefitted from the previous [share] appreciation. We cannot dismiss that it was also due to the sentiment, but I doubt that it is the predominant factor,” he explained.
When contacted, Inter-Pacific Research Sdn Bhd (Interpac) head of research Pong Teng Siew is of the view that the KLCI was propped up by window-dressing activities, thereby outperforming the FBM Small Cap Index.
He said the weakening ringgit has dampened the overall market sentiment, as well as investor confidence.
“If you look at the Nikkei Malaysia Manufacturing Purchasing Managers’ Index data, it had dropped to a five-month low in November, indicating low new orders in the manufacturing sector,” he added.
Pong also doesn’t see export-oriented companies enjoying the benefit of a weaker ringgit as much as they did in 2015.
“That’s because their customers are pressuring them to share the benefit this time around, by adjusting their selling price,” he said.
“The rebound [in small-cap stocks in December] is a good sign, which is the typical retail investors’ strategy — to bargain hunt after a dip. But the rebound may not be far reaching, after the first week of January 2017, investors may take profit,” he added.
In a note to investors last Friday, RHB Research opined that “until solid positive developments occur”, the research firm regarded the downside development as “still intact”.
“For now, we view [last] Friday’s rebound as the smal-cap [index] was merely taking a breather above the 14,281-point mark. As long as we do not see a solid bullish follow-through, we believe that the bearish influence is still there,” it noted.
In a 2017 outlook report released on Nov 24, 2016, Templeton Emerging Markets Group executive chairman Dr Mark Mobius, and Templeton Emerging Markets Group and Franklin Local Asset Management managing director and chief investment officer Stephen Dover said they continue to like Asian small-cap stocks as these stocks are particularly exposed to the solid growth potential expected from this region over the long term.
“This is helped by small-cap companies’ generally greater domestic focus than their larger peers, binding them less to challenging macroeconomic factors at a global level. Their valuations typically reflect the stronger growth expected from the smaller equities, but given there are thousands of small-cap stocks in Asia, the opportunities to discover mispriced securities are often plentiful.
“These valuation anomalies usually occur due to market inefficiencies as research coverage for many of these companies can be thin on the ground,” they said.