BETTER RISK-REWARD IN SMALL AND MID-CAPS – RHB RESEARCH

INVE$T | Market Sentiments

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According to RHB Research analyst Lee Meng Horng, it is time to be nimble in small and mid-caps on Bursa Malaysia given the better risk-reward ratio on current forward price to earnings (P/E). Both the FBM 70 and FBM SC are trading below their five-year means, and at about two times P/E discounts to that of the FBM KLCI — based on RHB’s stock coverage universe. In addition, the valuation of the MSCI Malaysia Small Cap Index is on par with the MSCI benchmark index, reversing the trend of the outperformance of small-cap indices in the past two years. This came as investors refocused on value-oriented big caps amid rising interest rates and greater market volatility. It is time to go long in this current sell-down with the expectation of a range-bound market amid a volatile backdrop and below-mean valuation. The investor’s strategy should be two-pronged — rotational play on sectors and bottom-up stock-picking — while continuing to look for ideas based on unique turnarounds, event-driven catalysts, exporters and politically linked thematic plays. The research house has a preference for the consumer discretionary, technology, logistics, oil and gas, and plantation sectors. The outperformance of the FBM SC (+5.3% year to date) continues in 2022, despite the market being range-bound overall in the absence of major positive catalysts, while uncertainties from external events linger. The FBM SC’s stronger performance has been underpinned by commodity-related stocks that benefited from the surge in various commodity prices. On the other hand, the FBM 70 (-5.8% year to date) has underperformed the FBM KLCI (-0.2% year to date) so far this year, as heavyweights that consist of mainly technology sector-related stocks took a beating amid high inflation and rising interest rates. The return of foreign fund inflows has supported the FBM KLCI so far, thanks to the Malaysian market’s defensive attributes, while the spike in commodity prices has been a boon. The market liquidity has declined, with the cautious tone from local institutions and a lack of participation from retail investors — further exacerbated by the risk-averse sentiment casting a further pall on the market. These factors were partially cushioned by the return of foreign fund inflows. Compounded by the resumption of intra-day short selling (IDSS), the market has witnessed a rather volatile market in the first quarter of 2022, especially for the small-mid cap space. In fact, year-to-date traded value for the FBM 70 and FBM SC declined by 32% and 61% respectively. Against the backdrop of a full-blown economic recovery in 2022, and supported by in-house gross domestic product (GDP) growth forecast of 5.5% year on year, certainly there are companies that are expected to perform well and record growth. However market volatility is expected to remain high for a large part of 2022, no thanks to the fluid situation and prevailing uncertainties. The upside is capped, as the expectation of a broad-based economic recovery seems priced in, while the downside continues to be supported by bottom-fishing activities. A ‘buy’ at the support level and ‘sell’ at the resistance level approach could thrive.  

BNM raises OPR to 2% from record low of 1.75% 

Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) on Wednesday (May 11) increased the overnight policy rate (OPR) by 25 basis points to 2% from a record low of 1.75% as global inflationary pressures have increased sharply and after taking into account that the sustained reopening of global economy and improvement in labour markets continue to support the recovery of economic activity from the impact of Covid-19-driven movement restrictions. The ceiling and floor rates of the OPR’s corridor are correspondingly increased to 2.25% and 1.75% respectively. Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US. For the Malaysian economy, latest indicators show that growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth. The OPR at 1.75% was the lowest dating back to 2004. The sustained reopening of the global economy and improvement in labour market conditions continue to support the recovery of economic activity. The global growth outlook will continue to be affected by the developments surrounding the conflict in Ukraine, Covid-19, global supply chain conditions, commodity price shocks, and financial market volatility. On the Malaysian economy, the latest indicators show that the country’s economic growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth. The labour market is further lifted by a lower unemployment rate, higher labour participation and better income prospects. The transition to endemicity on April 1, 2022 is expected to strengthen economic activity, in line with further easing of restrictions and the reopening of international borders. Investment activity and prospects have also improved, underpinned by the realisation of multi-year projects and positive growth outlook. However, risks to growth remain, which include a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding Covid-19. Malaysia’s headline inflation, as measured by the consumer price index, is projected to average between 2.2% and 3.2% in 2022. Given the improvement in economic activity amid lingering cost pressures, the country’s underlying inflation, as measured by core inflation, is expected to trend higher to average between 2% and 3% in 2022. Nevertheless, upward pressure on prices would be partly contained by existing price controls and the continued spare capacity in the economy. The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures on administered prices. Looking back over the course of the Covid-19 crisis, the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75% to provide support to the Malaysian economy. The unprecedented conditions that necessitated such monetary actions have since abated. With the domestic [economic] growth on a firmer footing, the MPC decided to begin reducing the degree of monetary accommodation. This will be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability. 

Eye On The Markets 

This week, on Friday (13May), the Ringgit opened at 4.3930 against the USD from 4.3760 on Monday (9May). Meanwhile, the Ringgit was 3.1476 to the Sing Dollar on Friday (13May). On Monday (9May), the FBM KLCI opened at 1563.80. As at Friday (13May) 10:00am, the FBM KLCI is down 19.22 points for the week at 1544.58. Over in US, the overnight Dow Jones Industrial Average closed down 103.81 points (-0.33%) to 31,730.30 whilst the NASDAQ added 6.73 points (+0.06%) to 11,370.96. 

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