PETALING JAYA: Small and mid-cap stocks will continue to draw investor interest for their unique exposure, above-industry growth on offer, and multiple re-rating catalysts despite trading at elevated valuations, according to RHB Research.
The research unit said it favoured the automotive, building materials, consumer discretionary, construction, technology, logistics sectors, as well as commodity plays.
Accommodative fiscal policies and low interest rate backdrop will likely continue to provide support to disposable incomes, which in turn, should boost consumer sentiment – benefiting sectors like automotive and consumer discretionary.
Construction is set to benefit from positive news flow from the revival or rolling out of mega infrastructure projects in 2021.
In the technology space, there are still pockets of opportunities in various sub-sectors that ride on the structural technological megatrends despite the high valuations.
The logistics sector is also set to ride on the recovery theme amid improving trading activities and volume following the reopening and resumption of economic activities, on top of a revival of secular e-commerce play, elevated freight rates, vaccine logistics, growing demand for third party logistics, and favourable measures and tax incentives from policy makers.
Commodity play that is expected to benefit from the high prices of aluminium, steel, copper, crude oil, and gold could still see an extended strong run, thanks to the near-term imbalance of supply and demand situation for various industries.
Noting that its 20 Jewels 2020 Edition continues to outperform the market with a return of 101%, RHB Research said the FBM70 (3.1%) and FBMSC (10.8%) carried on their strong run year-to-date-2021, supported by robust market activities and rising optimism in the recovery phase following the mass vaccination rollout.
The technology sector remains one of the major index movers, along with electronic manufacturing services, consumer and renewable energy, owing to the growth outlook and profit visibility.
At this rate, it is likely to defy historical trends, and outperform the FBM KLCI, sustained by remarkable interest among investors, especially from the retail segment.
The research unit also pointed out that trading activity remains buoyant with the year-to-date total turnover (traded value) up 25%, 11%, and 150% for the FBM KLCI, FBM70, and FBMSC – on greater market volatility, strong retail participation, and a prolonged low interest rate environment.
“Again, we notice sturdy interests in this space thanks to the wide stock selection array and outperformance in the past years, ” said RHB Research.
Surprisingly, signs of slowing market interest in FBM70 are seen with trading volume declining by 34% year-to-date while the FBM KLCI and FBMSC were still trending up.
The contraction in volume traded can be attributable to the higher price or valuation, following the strong price appreciation in 2020, especially for outperformers in the technology, electronic manufacturing services and consumer sectors, prompted investors to search for other growth stocks in the space in the FBMSC, for instance.
Elsewhere, growth in trading volumes for the FBM KLCI and FBMSC were consistent with the total turnover.
RHB Research also pointed out that the continued strength in year-to-date equity securities average daily value growth are mainly supported by retail participation grew to 38% (similar trend to 2020 but up from pre-Covid level of 24%) and sustaining trading activities from local institutions.
Robust retail participation has been stable, which more than offset foreign net outflows, where foreign ownership dropped to a record low level of 20.3%.
“We believe retail participation will continue to be elevated, supported by the low-interest environment and young age profile of the new pool of retail investors – as evidenced by the data on new central depository system account openings of 86,000 in the first quarter of 2021 (up from 76,000 in Q4’20). This should sustain strong interests and support the valuations in the small-mid caps space, ” said RHB Research.
However, the valuation for the MSCI Small Cap Index has overtaken the MSCI benchmark index for the local market over the past year, owing to the superb performance of many stocks in the smallcap space – drawing debate on whether valuation has started to crest.