PETALING JAYA: Small- and mid-capitalised stocks on Bursa Malaysia offer a compelling valuation opportunity as risk-on sentiment continues to improve in anticipation of a short-lived conflict in the Middle East, according to RHB Research.
It noted this space could be poised for a stronger performance in the second half of financial year 2026, as its performance has so far been lagging (FBM SC minus 0.2%).
This contrasts with the benchmark FBM KLCI and FBM 70 indices, which are up 4.8% and 9.9% year-to-date, respectively, due to investor positioning amid heightened geopolitical risks.
“We believe this lag is the precursor to a significant re-rating,” the research house stated in a market strategy.
“Market breadth within the FBM SC is showing early signs of recovery, and trading activity remains robust thanks to ample domestic liquidity and rotational interest.
“Most importantly, the valuation gap at a pronounced five to six times price-to-earnings discount to the FBM KLCI is attractive.”
This is supported by RHB Research’s earnings growth forecasts of 10.8% in the small- and mid-cap space versus 5.8% for the FBM KLCI.
The research house said cyclical recovery trends and ongoing sector rotation may provide scope for laggard stocks to re-rate, with its top sector picks being consumer, construction, industrial products, oil and gas, property, technology, and green energy.
It, however, warned that a prolonged conflict, accompanied by high energy prices, supply chain disruptions and/or weaker global demand conditions, could dampen investor appetite towards the small- and mid-cap segment.
That aside, RHB Research expects investor focus to shift towards fundamentally strong small- and mid-cap companies, supported by attractive valuations relative to historical averages and a favourable risk-reward profile for alpha returns seeking investors.
Some of its top picks with a “buy” call are Malaysian Pacific Industries
Bhd, with a target price (TP) of RM50.70 a share, UEM Sunrise Bhd (TP: 86 sen), Guan Chong Bhd (TP: RM1.30), CTOS Digital Bhd (TP: RM1.11) and Bumi Armada Bhd (TP: 54 sen).
To back up its investment thesis on small- to mid-cap stocks, its 21st edition of its Top 20 Malaysian Small-Cap Companies Jewels 2025 has delivered a value-weighted holding period return of 20.1% since May 2025. This performance significantly outpaced the FBM 70 (9.4%) and FBM SC (minus 2.5%).
The outperformance was recorded despite an investment and business landscape marred by reciprocal tariffs, heightened geopolitical risks and global supply chain volatility.
UOB Kay Hian (UOBKH) Research warned that rising expectations of an early general election (GE) could prompt investors to turn risk-off by the fourth quarter of this year.
This may lead to profit-taking, with investors shifting towards defensive and lower-beta portfolios.
The research house added that unlike in past general elections, construction stocks may not necessarily outperform, given the government’s tight fiscal situation due to exceptionally high subsidies.
It noted that spending priority is being shifted towards alleviating the cost of living rather than infrastructure projects.
Furthermore, its base case is for the GE16 to be held in the first half of financial year 2027.
UOBKH Research added that, in all likelihood, GE16 would face a hung Parliament, and the subcoalitions within the Madani government would “horse trade” to re-enact a ruling coalition.
