By Chan Quan Min
Did Bursa Malaysia’s small and medium cap stocks give the returns investors were looking for this year? That would depend on how well investors timed their entry and exit. KiniBiz takes a look at the year in review and goes through small and medium cap recommendations for next year.
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Bursa Malaysia’s small and mid cap stocks this year became the focus of investors, especially those with a stomach for riskier assets.
Investors bought into smaller stocks heeding the advice of major research houses and fund managers, almost all of which claimed the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) was close to reaching ceiling valuations.
This later proved to be the right call when the local bourse started to shed this year’s gains (and much of last year’s) from the final week of November as crude oil prices fell by about 40% to under US$60 (RM209.74) a barrel of Brent crude.
Up to then, the game plan was to move into small and mid cap stocks for better promise of capital gains. Smaller stocks have low visibility so there was at least a chance of uncovering the next outperformer. By the same logic, blue chips were considered overbought.
In theory, the potential for returns for smaller stocks is commensurate with the higher risk. Some of these returns were remarkable.
The automobile distribution business of Vincent Tan’s Berjaya Group in the space of 12 months doubled in value from RM1.60 per share in January to close the last day of November at RM3.30 per share. Berjaya Auto Bhd was only listed on the stock exchange in November 2013.
A retail investor profiled by Bloomberg reporters in a news story dated Oct 16, was said to have made a 40% return on a RM15,000 investment in steelmaker Pantech Group Holding Bhd in the past year.
The retail investor, Vincent Ng Sze Tat, is said to be just one of a growing number of private individuals across Southeast Asia making bets on small and medium cap stocks.
According to data compiled by Bloomberg, small and medium cap indices in Malaysia, Thailand and the Philippines have gained an average of 41% this year, almost four times the advance seen in blue chip benchmarks.
In all likelihood, Ng was acting on a hunch. “Some stocks don’t have fundamentals, but why not, when you can make some money from speculation,” he told reporters from the international news service.
Ng is not alone. Patrick Wong, a veteran remisier who remembers very well the go-go years that preceded the 1997 Asian Financial Crisis, told KiniBiz his last client timed her purchase of several lots of shares based only on a stock tip and the bid-ask spread. Wong said clients that buy into smaller companies don’t hold on for very long, sometimes not more than a day.
Not everyone made money
The performance of small and mid cap stocks this year, as measured by the FBM KLCI Small Cap Index, tells quite a different story. While stocks such as Berjaya Auto and Pantech did well this year, the average small to mid cap stock probably did not move by as much.
The Small Cap Index started the year in January at about 15,800 points, rose to a high of about 19,400 points in mid-August.
Investors that bought a portfolio of small cap stocks to track the index at the most opportune moment this year – between January and February – and sold at the peak in mid-August would have made a capital gain of at most 23%; not too shabby compared to a capital gain of just 7% for the FBM KLCI with perfect market timing.
But investors that bought their Small Cap Index weighted portfolios at the most opportune time but neglected to sell until after late November would have been sorely disappointed. Since the end of November, the Small Cap Index has been well under 15,800 points, the mark where it started the year at.
Earlier this week, the Small Cap Index stood at 15,170 points. Investors that did not have the foresight to exit mid-year would have been stuck with a non-performing portfolio.
Small and mid-cap picks
Mark Mobius
Most fund managers advocate a stock picking strategy when it comes to small and mid cap listed companies. Mark Mobius, emerging market investments guru at Franklin Templeton this month drove home the importance of being discerning in published comments following a recent visit to Malaysia.
“As investors in Malaysia, we feel it’s important to be selective, particularly given that valuations have been higher than in some other Asian markets, while at the same time, performance has generally been somewhat disappointing.
“One area of focus is smaller companies that we think have potential for growth, but that have been generally overlooked by other investors. Utilities is one area we think could potentially benefit as subsidies are lifted, and we believe profitability may improve as a result.
“We also like consumer-oriented companies that can stand to potentially benefit as Malaysia works toward its long-term goal of becoming a high-income country, and as more of its people potentially rise into the ranks of the middle class,” Mobius said.
It appears most research houses are thinking along the same lines. RHB Research in a recent report singled out just two small to mid cap stocks under its coverage by upgrading them both to a ‘buy’ call.
The first of the two is Unisem, a provider of semiconductor assembly and test services, praised for successfully returning to the black mid-year. RHB Research expects no less than a “sharp rebound” in the company’s financial performance for the second half of the year on improving utilisation rates.
Malaysia Steel Works also made the grade, going from a ‘neutral’ to ‘buy’ call on hopes that its new rolling mill, adjacent to its meltshop, would give a much-needed boost to its earnings. A word of warning from the research house: near-term results might be volatile.
TA Securities picked CapitaMalls Malaysia Trust, Media Prima and Fraser & Neave (F&N) to upgrade to ‘buy’ calls. The reason given was “deep correction in share price making valuations more attractive for re-entry.” For CapitaMalls Malaysia Trust there is the extra benefit of attractive dividend yields.
UOB Kay Hian’s small cap picks are Barakah Petroleum, MRCB, MPHB Capital and SKP Resources, all getting ‘buy’ calls. According to the research house there is still ample domestic liquidity to support selected situational plays such as Perisai Petroleum and Sunsuria.
Yesterday: The big boys: Banking sector and large cap picks
Tomorrow: Bursa Malaysia: Points of weakness
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