Small and mid-cap stock valuations stay attractive

PETALING JAYA: Small- and mid-cap stock valuations remain attractive for their growth potential, despite the strong first-quarter rally, a brokerage firm says.

RHB Research noted that numerous selective opportunities persist for investors, particularly in thematic trends, with small- and mid-cap stocks trading at near historical mean valuation.

“While the small-mid cap space is often preferred for its higher growth prospects and for stocks that are in the right thematic trend, balancing exposure between value and growth stocks is paramount in the current dynamic landscape.

“In the second quarter of 2024 (2Q24), various investment avenues remain relevant, including data centres; the property sector revival; regional growth themes in Sarawak, Johor, and Penang; strong commodities trends; and semiconductor space recovery.

“Additionally, optimism surrounding a stronger corporate earnings outlook from a low base in 2023 continues to persist, alongside potential opportunities in mergers and acquisitions and bottoming-out stocks for cyclical recovery.

“Favourable industries include property, construction, consumer, logistics, oil and gas and technology,” it said.

RHB Research also pointed out that a technology sector recovery is expected in the second half of this year, prompting investor positioning in 2Q24.

Additionally, the non-semiconductor space, particularly players in the information technology infrastructure segment, should continue benefiting from public spending and the technology refresh cycle.

Despite the optimism, RHB Research cautioned that volatility may ensue going into 2Q24.

The brokerage said it is typical of a less-robust global market season, compounded by the unveiling of 1Q24 results and the “sell in May and go away” phenomenon.

On valuations, RHB Research said the spread in the small- and mid-cap stock space has narrowed.

Despite the strong run-ups in the small- and mid-cap space year-to-date, forward price-to-earnings ratios for both the FBM Small Cap Index (11 to 12 times) and FBM Mid 70 Index (15 to 16 times) are currently at the near historical mean.

“This suggests that there are still various opportunities for investors to continue to look at winning stocks within these spaces.

“Nonetheless, small-to mid-cap stocks are presently trading at a slight premium to the FBM KLCI, based on our stock coverage universe, vis-a-vis higher growth expectations of 12.8% compared to 9.4% for the FBM KLCI.”

Looking ahead, RHB Research opined that the market momentum of small- and mid-cap stocks have continued so far this year.

FBM Mid 70 grew by 16% and FBM Small Cap rose by 12.6% year-to-date, both outpacing FBM KLCI’s growth of 10.1%.

The surge in FBM Mid 70 Index was driven by vigorous trading activities and the impressive performances of the property, construction and technology-related stocks.

In the case of FBM Small Cap Index, it was supported by the strength of property, construction, electronic manufacturing services and commodity stocks.

“Overall, sentiment received a significant boost amidst a slowing inflation and resilient domestic economy.

“Encouraging inflows from local institutions and foreign funds further bolstered the market rally.

“Corporate exercises, value-unlocking strategies and thematic plays also contributed to the dynamic market movement,” according to RHB Research.

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