PETALING JAYA: In the wake of the strong rebound of blue chips on Bursa Malaysia from their lows two months ago, the focus is now centred on small and mid cap stocks for their higher potential upside. 
RHB Investment Bank Bhd is starting to see value in small cap companies in the market from a longer-term perspective despite the elevated risk environment due to the coronavirus (Covid-19).
Regional equity research head Alexander Chia said small and mid cap stocks offered better value at this stage of the market where large cap stocks have staged solid rebounds off their March lows.
“The increasingly trading nature of the market also means a strong gravitational pull towards the high beta small and mid cap stocks, ” he said during a virtual launch of the 16th edition of the RHB Top 20 Malaysia Small Cap Companies Jewels 2020 book yesterday, featuring 20 new names that were not in the investment bank’s existing coverage.
He added that there is a strong demand for alpha rich small-mid cap stocks that are resilient and can survive the ongoing turmoil. Alpha stocks are those that can outperform when the market rises.
In his opening address, RHB Investment Bank chief executive officer Robert Huray said across 10 industry segments, the biggest representation of companies were from the technology sector and the technology and industrial products sector at 25% and 20% respectively.
A total of 13 companies or 65% of the RHB Top 20 have a market capitalisation of less than RM500mil.
The trailing median price to earnings (P/E) ratio and return on equity (ROE) of the 20 companies are at 12.6 times and 11.7% respectively, as compared to the benchmark FBM KLCI of 23.1 times and 8.9%.
The total market cap for the 20 companies as of April 30 is RM11bil while the median market cap is RM381.3mil.
Huray said amidst heightened uncertainties, alpha hunting remained a daunting task for most investors, given that the FBM KLCI has rallied vigorously, narrowing its year-to-date (y-t-d) losses to 13%, which ultimately raised the question of further upside potential for some of the large liquid stocks.
He pointed out that the small mid cap space had offered investors a 27% gain as compared to -4.4% for the benchmark index in 2019, although it was still off from its peak by a much wider margin, down 21.9% year-to-date.
“With the fate of many larger companies tied to global external demand, low commodity prices and lower domestic spending, we hope that the chances of identifying that winner in the new norm post Covid-19 will be higher for smaller companies that are able to move faster to capitalise on emerging opportunities.
“The global equities market is currently experiencing one of the wildest swings in recent history, precipitated by the pandemic.
“The clear disconnect between rising stock prices and a lack of future visibility on the economy and sustainable future earnings has lent an unsettled tone to the recent market rally, ” he said, adding that markets were now in an unprecedented era with market distortion peaks that were most probably biased by the massive liquidity injection across global monetary authorities.
Meanwhile, the investment bank’s small-mid caps research head Lee Meng Horng said the FBM Small Cap Index tends to outperform the broader market during an upturn and underperform during a downturn.
He said the base case assumption of the pandemic being broadly contained in the first half of 2020 followed by a recovery in 2H20 should bode well in the small cap space.
