Year-to-date, the FBM 70 has contracted 14.6% and the FBM Small Cap has declined 15.3%.
PETALING JAYA: Despite the prevalent risk-off sentiment in the stock market, there could be opportunities to trade FTSE Bursa Malaysia (FBM) small-to-mid-capitalised stocks in industries with strong fundamentals, following the drop in prices and as external uncertainties subside.
RHB Research advised investors to focus on the small-to-mid-capitalised stocks as they catch up to the larger-capitalised stocks, given the abundance of undervalued opportunities arising from the market correction.
It noted that year-to-date, the FBM 70 has contracted 14.6% and the FBM Small Cap (FBM SC) has declined 15.3%, underperforming the benchmark FBM KLCI, which dropped 6%.
“The steep correction reflects investor rotation out of high-alpha names, particularly within the small-mid capitalised segments that are exposed to export and policy headwinds,” it said.
“This is consistent with the regional markets in Asean where small capitalised index underperformed. Sentiment remained soft – weighed down by persistent geopolitical risks and tariff concerns,” it said, adding the FBM SC faced the most significant contraction, with trading volume and value dropping 44% and 32%.
This was on the back of overall negative trading volume as the benchmark FBM KLCI saw a 4% decrease in turnover indicating a more cautious approach towards larger-capitalised stocks amid prevailing external uncertainties, although the FBM 70 experienced an 8% volume increase year-on-year suggesting net fund outflows and portfolio repositioning activities within the mid-capitalised stocks.
It pointed out that the correction in the small-to-mid-capitalised space has sent valuations below historical mean levels, with the FBM 70 contracting to a five-year low of 12 times.
“Growth expectations are at a more attractive level of 17.9% for the small-mid capitalised space as compared to 4.7% for the FBM KLCI. Both the FBM SC and FBM 70 are currently trading at below 10-year historical median valuation spread to the FBM KLCI, highlighting the attractive risk-reward profile for alpha returns in this sector,” it said.
“In the near term, investors should prioritise mid-cap stocks in industries with strong fundamentals, such as those poised to benefit from sectoral tailwinds or government policies.
“The small-mid capitalised space is often preferred for its higher growth prospects and for stocks that are in the right thematic trend,” the research house said, adding that investors should focus on balancing exposure between value and growth stocks in the current volatility.
It listed that the focus should be on earnings quality, margin preservation, cash flow, and thematic trend, especially on the backdrop of tense geopolitical conflict, cost escalations and demand uncertainty, with favoured industries being consumer, construction, plantation, property, technology and green energy.
“Economic recession, intensified trade-war situation, earnings disappointment, liquidity issues, demand uncertainty, and ESG-related risks are things to watch out for,” it said.
It advocates a phased strategy where investors should first focus on mid-capitalised stocks that likely lead to recovery and then, with external uncertainties subsiding, a gradual shift towards the smaller- capitalised stocks to unlock alpha returns during sustained rebounds.
