Thursday 28 Mar 2024
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KUALA LUMPUR (Dec 9): Investors are advised to focus on value stocks with a healthy cash flow generation and dividends that offer a compelling valuation that will grow and prevail under the current challenging environment, said RHB Investment Bank Research.

The research house said a reasonable valuation would, in turn, serve as a buffer should there be any miss in earnings forecasts due to the uncertain overall macroeconomic environment. 

“At current below-mean valuation, investors should continue to position for 2023 searching for alpha ideas, as we advocate the evergreen strategy of constructing a portfolio of strong risk-adjusted returns in the longer run. 

“We believe value stocks should take the centre stage in a quantitative tightening cycle, while keeping the sector rotational play in check, as excessive valuation may draw profit-taking activities in the current environment.

“Our ideas are focused on domestic play, inelastic demand, low prevailing valuations, and unique turnaround or growth catalysts,” wrote RHB Research analyst Lee Meng Horng in a note on Friday (Dec 9). 

Among the sectors RHB Research favours include consumer staples, consumer discretionary, healthcare, technology, logistics as well as oil and gas (O&G). 

Lee noted that accommodative fiscal and monetary policies should continue to lend support to private consumption, supporting the consumer discretionary sector. 

As for the O&G sector, he viewed that the upcycle may continue with higher capital expenditure allocations and floating production, storage and offloading (FPSO) demand, which should translate into a positive earnings cycle. 

“[Meanwhile], selective value buys within the technology space should do well in a relatively less demand-susceptible sub-segment. 

“The logistics sector, on the other hand, should continue to benefit from elevated freight rates, growing demand for third-party logistics services, and favourable tax incentives from policymakers,” he said. 

MSCI Malaysia Small Cap Index on a par with MSCI benchmark index 

According to Lee, the current below-mean forward price-earnings for the FBM 70 of 13.5 times and FBM SC of 10.7 times appears to be in a risk-reward balance.

While the FBM 70 and FBM SC are trading at below their five-year mean, the valuation gap between small to mid caps and the big caps based on RHB Research’s stock coverage universe, said Lee, has narrowed to 1.2 times, showing similar strong appetite in the small to mid cap space given its unique exposure or growth story despite the general preference for large-cap value stocks in the current market environment. 

“Despite the recent market rally, the valuation remains inexpensive in view of less pessimistic sentiment, following the seemingly inflection point reached in the domestic political scene and global inflation as well as interest expectations. 

“Interestingly, the valuation of the MSCI Malaysia Small Cap Index is on a par with the MSCI benchmark index, with a similar elevated valuation trend observed for the MSCI small-cap indices in markets like Japan, Singapore and Thailand,” he said. 

Meanwhile, Lee said the lack of market liquidity this year was dragged by the lack of retail participation, risk-averse sentiment, unfavourable macroeconomic conditions, and compounded by the resumption of intraday short selling.

Both local institutional and retail investors, he opined, stayed on the sidelines for most part of the year, as sentiment was suppressed by the rising interest rate environment, on top of geopolitics and Covid-19 restrictions in China.

“As the dust settles in the domestic political scene at least for now, potential signs of the peaking of inflation and interest rate hike cycle, coupled with the progressive reopening of China from lockdowns, our local bourse has come into life after a dreadful year. The FBM KLCI staged a relatively strong rebound of 6.7% from the six-month low in October this year, and the FBM 70 and FBM SC following suit to recoup some losses,” he said.

To date, Lee said the FBM SC has outperformed the KLCI (-3.8%), thanks to the outperformance of chemical, consumer and O&G counters with unique catalysts. 

In contrast, the relative weaker performance of the FBM 70 (-9.2%) compared to the KLCI was due to the de-rating of technology and glove-related stocks, and the outperformance of banking stocks and a net foreign inflow for the KLCI.

Lee also said RHB's Top 20 Malaysia Small Cap Companies Jewels 2022 outperformed the broader market with a value-weighted holding period return of 20%, since the research firm’s book launch on May 12, as compared to the returns of benchmarking indices, namely the KLCI (-5.7%), FBM 70 (-2.7%), and FBM SC (-5.9%).

This was despite the extremely volatile market, as investor sentiment was rocked by weakening demand, rapid rises in interest rates, stubbornly high inflation, strength in the US dollar, protracted lockdowns in China, and geopolitical crises.

“Overall, our 2022 picks outshone the market indices [in terms of the] value-weighted return, equal-weighted return or price-weighted return. 

“There were 10 gainers and 10 losers, with stocks from the O&G sector making up the majority of winners, due to elevated crude oil prices as a result of the geopolitical conflict, supported by robust FPSO demand and higher capital expenditure spending,” added Lee.

Other gainers were from the healthcare, consumer and industrial sectors.

Edited BySurin Murugiah
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