KUALA LUMPUR (July 15): Investors were “overwhelmingly underweighted” in Malaysia due to the numerous headwinds facing the country, but appetite for fundamentally-sound small-caps stocks remains strong, said CIMB Research.

“We were surprised [as to] how underweighted Malaysian funds were, as they joined their foreign counterparts in keeping positions to a minimum and raising cash holdings,” said head of Malaysia research Terence Wong, in a note yesterday (July 14).

He said many investors are keen to know as to when there will be a recovery in Malaysian equities. Similar to last year, foreign funds were concerned about Malaysia's macro picture from the economic and political perspectives.

“Many wanted to know [as to] when to position for a possible recovery, which we said could come 3Q, as the confluence of negative factors should provide a good opportunity for investors to accumulate.

“We believe that, by 4Q, most of the bad news would have been priced in and the market should stage a recovery,” said Wong.

Nevertheless, he pointed out that appetite for bottom-up, fundamentally-sound stock ideas, particularly from the smaller-cap space, remained firm.

“We believe larger-cap defensive stocks can provide investors a margin of safety, but it is still the smaller caps where investors will drive alpha.

“We expect smaller caps to outperform as 2015 is a stock-picking year and our top picks include MyEG Services Bhd, Prestariang Bhd and Only World Group Holdings Bhd, while the two higher-risk higher-return picks are IFCA MSC Bhd and GHL Systems Bhd,” he said.

He noted while Singaporean investors had largely underweighted Malaysia due to concerns over 1MDB and Malaysian politics, they were interested in smaller-cap stocks with “interesting and exciting prospects”.

“Singapore investors lamented the fact that larger caps were underperforming, but signaled their delight that there were many smaller-cap stocks with interesting and exciting prospects, unlike in Singapore, where such companies were lacking,” said Wong.

He added that for larger-cap stocks, CIMB Research likes Gamuda Bhd, IJM Corp Bhd and YTL Corp Bhd for exposure to the construction and infrastructure sector, as well as Petronas Gas Bhd and Tenaga Nasional Bhd for the relative safety of the utilities sector.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)