KUALA LUMPUR (July 25): Small capitalised (small caps) stocks have the potential to generate returns the long run despite having underperformed so far this year, according to CIMB Research.

“We are still bullish on small caps in the long run because of our view that they offer investors stronger growth prospects and are under-institutionalised,” CIMB Research analysts Nigel Foo and Walter Aw wrote in a note today.

“Also, in the longer run, we think the small cap space would continue to provide investors opportunities to unearth ‘alpha’ gems,” they said.

The FBM Small Cap Index (FBMSC) has underperformed the benchmark KLCI so far this year, down 12% against the KLCI’s 2% decline, CIMB Research noted. This is compared to a reversed trend the year before, where the FBMSC gained 16% versus a 7% gain by the KLCI.

This could be due to poor corporate earnings over the past few quarters, foreign equity outflows and expensive stock valuations as at end-2017, Foo and Aw said.

Although they foresee a volatile second half of 2018 amidst an ongoing review of government policies, slower gross domestic product and external pressure, several themes could guide investments in small caps. The first is consumer stocks with defensive earnings such as Bonia Corp Bhd, CCK Consolidated Holdings Bhd, Kawan Food Bhd and Lee Swee Kiat Group Bhd.

“Second (is) bombed-out stocks with attractive valuations such as Signature International Bhd and Tan Chong Motor Holdings Bhd. We also see value emerging for Prestariang Bhd if its Sistem Kawalan Imigresen Nasional (SKIN) concession is intact,” CIMB Research said.

In the construction space, the analysts highlighted Muhibbah Engineering (M) Bhd for its robust Cambodian airport concessions.

“We believe that any sell-down in our selection of small cap stocks offer investors opportunities to accumulate,” Foo and Aw said.

Overall, the duo remained neutral on the small-cap space.