This article first appeared in The Edge Financial Daily, on January 19, 2016.

KUALA LUMPUR: Mid- and small-cap stocks took a beating again yesterday amid the prevailing state of cautious global sentiment that has weighed on ACE Market counters with heavy selling.

The FBM Small Cap Index (FBMSCAP) slipped 205.5 points or 1.32% to close at 15,492.04 points, while the FBM ACE Index, which features ACE Market-listed counters, fell 139.99 points or 2.25% to settle at an eight-week low of 6,074.82 points. The fall was in tandem with the weaker global market sentiments.

Year to date (YTD), the FBMSCAP has fallen 2.84%, while the FBM ACE has declined 4.92%.

Meanwhile, the benchmark FBM KLCI dropped 5.91 points or 0.4% to close at 1,622.64 points yesterday, recording its third consecutive day of losses. YTD, it has lost 4.13%.

The continued drop in oil prices fuelled the selling in the equity markets, particularly in the Middle East, where worries of oil glut are mounting after the sanctions against Iran were lifted over the weekend.

The intensive selling on small-cap stocks raises concerns that the bubble of high valuations among the lower liners might have burst; thus there is a rather bleak outlook on the horizon for this breed of stocks. But others beg to differ, believing that earnings growth could be more exciting than the heavyweights.

“The fall was expected as companies with smaller market capitalisations had begun to get overheated,” Inter-Pacific Securities head of research Pong Teng Siew told The Edge Financial Daily over the phone yesterday.

“A good majority of small-cap stocks are overvalued. It may take one whole year for the valuation to normalise,” he said, noting that majority of the stocks were trading at a high price-earnings ratio (PER) of 13 times to 15 times, compared with a normal single-digit PER of eight or nine times.

Hence, Pong said that the small-cap stocks are no longer “safe” and “attractive” to investors at the moment. “I suggest investors to sell their shares at least for now and accumulate them back when the valuation starts to normalise,” Pong said.

Over at the derivatives market, the spot month FTSE Bursa Malaysia KLCI Futures gained three points to close at 1,618 points yesterday, but still traded at a slight discount to the key index, indicating investors remain bearish on the broader market.

RHB Research Institute technical analyst Rijel Sid said the FBMSCAP is likely to continue heading south for this week as there is no significant bullish pattern on the technical chart.

“The index has fallen too close to the 200-day moving average line. Technically, this indicates that the immediate sentiment is weak,” he said. “Our immediate support remains at 15,441 points. On the flip side, we keep our immediate resistance at 16,040 points,” he added.

Nevertheless, one man’s meat is another man’s poison. Some investors see the share price weakness as good bargain-hunting opportunities.

While many fund managers are switching their investment portfolio to defensive stocks, given the current market volatility, Areca Capital chief executive officer Danny Wong remains optimistic about the small-cap stocks.

“I think there is still room for small-cap stocks to perform as they have better chance of faster earnings recovery compared with big caps,” he said.