KUALA LUMPUR: Penny stocks are seeing a buying frenzy of late as the local market is fuelled with positive sentiment driven by expectations of better financial results and positive foreign fund inflow.
The ratio of value to volume, with regard to total transactions on Bursa Malaysia, was at 0.57 times yesterday (based on a volume of 3.66 billion shares and value of RM2.1 billion). This compares with an average of 1.1 times in 2016 and 0.9 times year to date.
A ratio of below one is an indicator that the average price of stocks traded were below RM1, while a ratio of above one indicates that the average price was above RM1.
A technical analyst shared with The Edge Financial Daily that it is normal for the small- and mid-cap counters to dominate the market activity, and thus the ratio is usually below one. But if the ratio moves closer to 0.5 or below, it’s an indication that the penny counters are significantly more active than normal.
Mercury Securities Sdn Bhd research head Edmund Tham said that if the current trend continues, it is an indication that fundamentals have taken a back seat for investors as they search for profit in the stock market.
“If this trend continues, it doesn’t look very good. That means most people are no longer looking at fundamentals, but on the fast-moving kind of stocks,” Tham said.
Yesterday, the average price of the top 20 active counters on Bursa was only 14.2 sen, with nine of them trading below the price of 10 sen.
Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew told The Edge Financial Daily that a lot of investors have been encouraged by the improved fundamentals in the country after better financial results for the last quarter of 2016.
“People are looking forward to more growth in the first quarter of this year and expect the results to give a lot of encouragement for better quarters ahead. There has been a swing in the expectations, and investors are expecting the earnings cycle to turn positive from now on,” Pong said of the current positive sentiment in the stock market.
He said the current momentum built up in the small- and mid-cap stocks was not something new, pointing out that this was seen in the 2013 to 2015 period when the small- and mid-cap players outperformed the FBM KLCI.
He, however, does not see such a trend extending for a long period given that the nation’s money supply growth is not at a very strong level.
Pong also said that the economic outlook remains uncertain despite a more positive view on 2017.
“While valuation looks high, it is possible to still go higher. We still like certain stocks and it’s still possible to make some money from the market,” he added.
Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng, when contacted, said that it is uncertain if the current momentum in the market would continue.
He, however, acknowledged that the momentum exists at the moment as reflected in the market’s uptrend.
Areca Capital Sdn Bhd chief executive officer Danny Wong said it is normal for penny stocks to gain momentum after a surge in the big caps with the foreign fund inflows.
“It is a usual cycle. When foreign funds come in, usually the market would be led by the big caps. Under this scenario, net sellers would be the local institutions most of the time. In the beginning stage, any trading activity by retailers would be very small. Only when the big caps have run up, would the volume come. When foreign funds continue to come in, the small retailers would jump in.
“The big caps would then go through some kind of consolidation. The second liners and third liners would come in. Recently, this is the later part where there was some interest in the small- and mid-caps. It would be a rotational play, depending on whether the foreign fund will continue to come in,” Wong said.
He also said that in an active market, it is common for the second and third liners to dominate trading activity.
Wong highlighted that the market has been boosted by the sentiment early this year and that valuation would be reasonable if earnings growth could be sustained.
“Valuation is very subjective. The previous historical high was about 1,890, today (yesterday) [FBM KLCI] is only at about 1,740. It’s about 150 behind its historic high, whereas in the US the main indicator has broken so many record highs,” he said.
“If global growth were to be driven by US recovery, by right the emerging markets will also benefit. It should be reflected in the earnings of the listed company. By then, it will be earnings-driven and not solely on sentiment,” he added.
Wong cited the US economic growth, momentum seen in the financial results for the second half of last year and the low-base effect as factors pointing to better earnings in the coming quarters.
“I think the first quarter results in 2017 will be crucial to keeping the momentum in the stock market,” he said.