• Market remains steadfast. Despite the robust performance, market valuation remains near the historical mean. We believe the small-mid cap arena is renowned for its agility and exposure to various thematic trends, offering potential for alpha generation although the big-cap space is equally vibrant. Once again, the RHB Top 20 Malaysia Small Cap Companies Jewels 2023 demonstrated positive trends, outperforming the broader market with a remarkable 46.4% return. A strategy focusing on profit taking from winners commanding rich valuation and an emphasis on laggard plays in bottomingout stocks, may prove prudent. We continue to like names from the property, construction, consumer, logistics, oil & gas, and technology sectors.

• The 20 Jewels did it again! A remarkable value-weighted holding period return was achieved since our book launch on 16 May 2023, compared to the FBM 70 (+26.1%) and FBM SC (+21.4%) (see page 6 for detailed information on the performances). This performance is noteworthy given the prevailing market volatility stemming from a prolonged high interest rate environment and geopolitical tensions at the time of our book launch. During the comparative period, the FBM SC and FBM 70 also experienced significant gains, buoyed by optimism surrounding better economic prospects, in addition to the various thematic plays.

• The momentum continues. The FBM 70 (+16.0%) maintained its robust momentum, outpacing the FBM KLCI (10.1%). This surge was driven by vigorous trading activities and the impressive performances of the property, construction, and technology-related stocks. Similarly, the FBM SC (+12.6%) marginally outpaced the FBM KLCI, supported by the strength of property, construction, EMS, and commodity stocks. Overall, sentiment received a significant boost amidst a slowing inflation and resilient domestic economy. Encouraging inflows from local institutions and foreign funds further bolstered the market rally. Corporate exercises, value-unlocking strategies, and thematic plays also contributed to the dynamic market movement.

• Elevated market volume. The strong trading interest seen in 2H23 sustained into 2024 for the YTD trading value of FBM 70 (+40%) and FBM SC (+55%) – on the back of investors’ revived interest in our local bourse, spurred by accommodative government initiatives, as well as thematic plays such as Johor, Sarawak, water, infrastructure, data centre, and better corporate earnings prospects. This is further boosted by signs of increased foreign investor participation stemming from more fund flows into the emerging market (EM).

• Valuation spread has narrowed. Despite the strong run-ups in the smallmid-cap space YTD, forward P/E for both the FBM SC (11-12x) and FBM 70 (15-16x) are now at the near historical mean as shown in Figures 12 and 13, based on Bloomberg data. This suggests that there are still various opportunities for investors to continue look at winning stocks within these spaces. Nonetheless, small- to mid-cap stocks are presently trading at a slight premium to the FBM KLCI, based on our stock coverage universe as indicated in Figure 11, vis-a-vis higher growth expectations of 12.8% compared to 9.4% for the FBM KLCI.

• Strategy. We advocate for investors to prioritise fundamentally strong companies capable of delivering above-industry growth, alongside identifying turnaround candidates. Various investment avenues remain pertinent, including the burgeoning demand for data centre infrastructure, regional growth themes in Sarawak, Johor, and Penang, robust trends in commodities, and the recovery in the semiconductor space. Additionally, laggard plays on bottoming-out stocks are expected to persist in current market conditions. Economic recession, persistent high interest rate environment, earnings disappointment, liquidity issues, political instability, and ESG-related risks are among the potential risks.

Source: RHB Securities Research - 13 May 2024