(Oct 16): After getting a 40 percent return on a $4,580 investment in steelmaker Pantech Group Holdings Bhd. in the past year, Vincent Ng Sze Tat is looking for the next winner among Malaysian small-cap stocks.
No matter that Aberdeen Asset Management Plc and PCCI Securities Brokers Corp. say gains among some of Asia’s riskier shares are overdone, while the heads of exchanges in Thailand and Malaysia are urging investors to exercise caution when trading in the smallest stocks.
Ng is one of a growing number of private individuals, or retail investors, across Southeast Asia pouring money into the region’s riskiest shares, attracted by gains that have outstripped the indexes of larger stocks this year. Small- and medium-cap indexes in Malaysia, Thailand and the Philippines have gained an average 41 percent this year, almost four times the advance by benchmark gauges of bigger companies.
“Some stocks don’t have fundamentals, but why not, when you can make some money from speculation,” Ng, the 27-year-old owner of an events-management company, said in an interview in Kuala Lumpur. He said investing in larger companies such as Genting Bhd., which owns leisure, gambling and plantations companies, hasn’t been profitable.
Trading by individuals in Malaysia comprised 31 percent of total value in August, up from 14 percent recorded in March 2013, as the FTSE Bursa Malaysia Small Cap Index climbed to the most expensive level in more than six years. The Philippine small-cap gauge has added 24 percent this year, while the benchmark measure for Thailand’s small-cap bourse, where individuals make up 96 percent of the market, surged more than 90 percent.
Correction Imminent
Turnover on Thailand’s MAI Index averaged 8.77 billion baht ($270 million) a day in September, four times more than the average in the first eight months, bourse data show.
Increased activity in small caps is a signal that a correction is imminent, said James Lago, head of research at Manila-based PCCI Securities Brokers.
The Malaysian small-cap measure has fallen 14 percent from this year’s Aug. 19 high when its price-to-book ratio reached 1.2, the highest since January 2008, data compiled by Bloomberg show. Thailand’s MAI Index, a gauge of 106-member small-and medium-cap stocks fell the most in nine months on Oct. 6. The MSCI Philippines Small Cap has dropped 3.8 percent since climbing to a 15-month high on Sept. 30, when it traded at 1.5 times net assets.
Beyond Fundamentals
“It’s very hard now to find hidden jewels among small-cap companies’ shares as their prices have gone up substantially,” Adithep Vanabriksha, the Bangkok-based chief investment officer at Aberdeen Asset Management, said by phone on Sept. 17. “Many of them have valuations that are beyond their fundamentals.” His Aberdeen Small Cap Fund has gained an average 27 percent annually in the past five years, the best performer among 207 equity funds domiciled in Thailand, data compiled by Bloomberg show.
Investors should take time to research small-cap stocks, given the potential for “substantial” losses, Prapan Charoenprawatt, the president of Thailand’s Market for Alternative Investment said in an interview Sept. 11. Individuals should “exercise caution” when investing in penny stocks, Malaysia’s Bursa Chief Executive Officer Tajuddin Atan said in an interview on Aug. 29.
Economic growth in the region will probably slow to 4.7 percent in 2014, the weakest pace since 2009, from 5.2 percent last year, according to the International Monetary Fund.
Corporate Earnings
The lure of faster profit growth will keep individuals investing in smaller companies, according to Alexander Chia, the head of Malaysia research at RHB Research Institute Sdn.
Profits of companies in Malaysia’s FTSE Small Cap Index will grow 37 percent in the next 12 months, compared to a 5.5 percent gain for the FTSE KLCI Index of larger companies, data compiled by Bloomberg show.
‘There is more upside, I don’t think the party is over yet,’’ Chia said. “Mid and small-caps generally as a group tend to offer better growth than big blue chips.”
For Malaysia’s Ng, investing in small-cap stocks remains his preferred way to bolster his wealth. “My money would not grow fast if I keep everything in the bank,” he said.