THE Malaysian stock market is never short of lucrative money-making opportunities, even as the benchmark FBM KLCI’s annual performance in 2019 was the worst in 11 years.
To illustrate, assuming an investor had invested RM1mil in KNM Group Bhd shares at the start of 2019, his or her fortune would have increased to RM5mil by year-end.
An analysis by StarBizWeek shows that engineering and energy company KNM was the biggest gainer on Bursa Malaysia in percentage terms, up by 400% in 2019 alone.
All the top five performers posted an increase in share price of between 311% to 400%.
It is worth noting that the best-performing “jewels” of the Malaysian equities market in 2019 came from the mid- and small-cap universe.
The FBM Mid 70 Index, which is often used to gauge the 70 mid-cap stocks on Main Market, recorded a 10.4% increase in 2019.
Meanwhile, the FBM Small Cap Index also surged by 25.4% – a sharp rebound from a decline of 34% in 2018.
In comparison, the 30-stock FBM KLCI underperformed both Mid 70 and Small Cap Indexes as the former fell by 6% in 2019, on the back of several concerns including heavy outflow of foreign funds.
This marks another year of decline for FBM KLCI after 2018’s negative capital return of 5.9%.
Moving into 2020, market pundits expect the mid- and small-cap stocks to see yet another good run.
Speaking with StarBizWeek, Areca Capital Sdn Bhd chief executive officer Danny Wong foresees the Mid 70 and Small Cap Indexes to perform well again this year.
However, the fund manager indicates that “it may not be as easy as last year”.
“In 2019, the small- and mid-cap stocks had a very good run as they were coming from a low base, considering the weak performance in 2018. But moving into 2020, investors must be cautious on such stocks as they are generally no longer cheaper in terms of valuations.
“However, as long as there is support from earnings growth, some small- and mid-cap stocks will continue to see a good price uptrend. Investors can consider such stocks, ” he says.
Wong prefers small- and mid-cap stocks in the technology and consumer sectors.
On earnings prospects, he says that “they are likely to remain as attractive as in 2019”.
Echoing a similar stance, Fortress Capital CEO Thomas Yong believes earnings growth for small caps should remain resilient in 2020, subject to external factors and domestic politics.
He, however, says that the valuation of the FBM Small Cap Index has caught up with the FBM KLCI.
For context, the price-to-earnings ratio of FBM Small Cap Index for financial year 2020 stands at slightly below 15 times versus its historical average range of 10-12 times.
This implies that the positive earnings growth expectation has largely been baked into the current prices of most small-cap stocks.
“Given uncertainties regarding global economic conditions amid trade tension between the US and China and our country’s leadership transition that is expected to take place this year, investors should remain cautious and stay selective on certain small-cap stocks with higher earnings visibility and structural growth drivers, ” says Yong.
When asked about his preferred sectors for small- and mid-caps, Yong picks the oil and gas (O&G) and plantation sectors.
“Rising activity levels, coupled with an acceleration in work orders by Petronas, should benefit the entire domestic O&G services value chain.
“Meanwhile, in the plantation sector, the B30 & B20 biodiesel mandates in Indonesia and Malaysia, respectively, in 2020 is expected to raise crude palm oil consumption by three to four million tonnes per annum.
“Coupled with muted supply growth, pure upstream players should see profits turning around, ” Yong says.
Meanwhile, Rakuten Trade Sdn Bhd vice-president of research Vincent Lau points out that the FBM Small Cap Index’s current level of 14,278 points is still way below the 18,230 points seen back in 2018.
“We have also not reached the 5 billion to 6 billion volume trading levels. We remain positive on the prospects of the small caps and believe there is still upside from the current levels.
“We think the index could potentially hit 15,500 to 16,000 points by end-2020, ” says Lau.
MIDF head of research Mohd Redza Abdul Rahman is positive that there is still room for selected small and mid-cap stocks to move upwards.
However, he cautions that one needs to look at specific sectors.
Redza expects a ramp up in major infrastructure projects such as the East Coast Rail Link and the continuation of infrastructure projects in Sarawak.
“Another factor could be from the commodities sector as there is still room to catch up from the plantation and oil and gas sectors, especially as evidence of further earnings recovery, coupled with improving inventory numbers come to fruition during the February earnings season, ” he says.
Redza adds that the Visit Malaysia Year campaign in 2020 would further aid in earnings growth of manufacturing and food and beverages counters in the small- and mid-cap space.