This article first appeared in Capital, The Edge Malaysia Weekly on July 24, 2023 - July 30, 2023

THE performance of Southeast Asia’s equity markets has been lacklustre this year, owing in part to strong net foreign outflows. Bursa Malaysia is no different; in fact, the local benchmark index has been a top underperformer among its regional peers.

After briefly touching the 1,500-point level in January this year, the benchmark FBM KLCI has been shedding its gains. At end-May, it fell below 1,400 points, and stayed in that region for a stretch of 1½ months. The KLCI seems to have rebounded of late, climbing back above the 1,400-point level, closing at 1403.03 points last Tuesday.

Notably, a similar trend is observable on the broader market. Using the FBM Emas Index as a gauge for the broader market, the index climbed from 10,701.55 points at the start of the year to hit 10,909.63 points on Jan 30. Thereafter, it declined to 10,124.28 points on June 8 — the lowest close year to date (YTD). It has since rebounded a little, moving up to 10,415.06 points at the close of July 17.

This means that, YTD, the Emas Index has declined 2.7% against the FBM KLCI’s 5.94% drop.

“The local market is oversold,” says Rakuten Trade head of equity sales Vincent Lau. He highlights that funds have been sitting on the sidelines and many investors are waiting to see the outcome of the state elections on Aug 12.

Earlier, there were also jitters that the US would fall into a recession this year, which now looks unlikely, implying that conditions are looking rosier than expected.

“The share prices currently reflect the expectation that everything will go south and the fact that that has not gone off the cliff shows that selling is overdone,” notes a head of research with a local research house.

Having said that, market experts say the valuations of local equities are cheap at the moment.

In the mid-cap equity space — comprising companies with a market capitalisation of between RM500 million and RM2 billion — significant share price gains have been seen in selected stocks, partly because valuations are cheap compared with a year ago.

Nonetheless, trading volume in the mid-cap space can be low, thus making the movement in share price look significant when trades take place.

Data compiled from Bloomberg showed that the top 50 mid-cap stocks with the highest YTD share price gains came largely from technology, electronic manufacturing services (EMS) providers, property and construction sectors.

The shares that have gained the most YTD are those of EG Industries Bhd, rising more than 200% since the start of the year; AirAsia X Bhd (194%); and RGB International Bhd (100%).

EMS company EG Industries has seen its share price climb steadily this year since it announced a private placement exercise in February. The company has reported improvements in earnings in its current financial year.

Its net profit has risen almost 90% to RM10.6 million in its third quarter ended March 31, 2023 (3QFY2023), on revenue of RM350.5 million, as it saw higher sales of consumer electronic products, 5G wireless access and photonics modular-related products.

On a cumulative nine-month basis, the group’s revenue increased 28% to RM1.1 billion and net profit surged 86% to RM28.8 million, already exceeding its FY2022 net profit of RM10.17 million.

According to data compiled by Bloomberg, there is a target price of RM2.23 on EG Industries, implying an upside potential of 31%, based on its closing price of RM1.70 on July 17.

Meanwhile, AirAsiaX seems to have returned to investors’ radar after the difficult last few years. The aviation group, which fell into PN17 status at end-2021, is seeing a good run in its share price this year. The worst seems to be over for the aviation industry as passenger travel picks up post-Covid 19, resulting in an improvement in earnings for the budget airline.

It has also been reported that AirAsiaX is ready to make an application to lift itself out of PN17 status soon, ahead of the July 28 deadline to submit its regularisation plan to Bursa.

Meanwhile, technology counters such as Globetronic Technology Bhd have seen their share price rise 38% YTD while the share prices of Aurelius Technology Bhd, Mi Technovation Bhd and JF Technology Bhd have risen almost 30%.

Lau believes the worst is over for the technology sector, with emerging trends such as artificial intelligence and electric vehicles poised to drive the sector’s growth.

“Technology is always evolving. I believe that a meaningful recovery for the sector will take place in 2024,” he says.

Interestingly, companies with the most “buy” recommendations among the Top 50 mid-cap stocks are property developer Mah Sing Group Bhd and construction firm and property developer WCT Holdings Bhd.

There are 14 “buy” calls on Mah Sing, with an average target price of 77 sen. Its 12-month forward price-earnings ratio is 7.84 times. Based on the closing price of 65 sen on July 17, this implies 18% upside potential for the stock.

Seven of the 10 research houses covering WCT have given the stock a “buy” call. Ana­lysts’ average target price is 54 sen, implying 22% upside potential based on its closing price of 44 sen on July 17. YTD, WCT’s share price has increased 10%.

A head of research who declined to be named believes that the share prices of mid-cap stocks can continue to climb, but he does not expect to see double-digit growth.

“A lot of the bad news has already been reflected in the first half of the year and the economy seems to be growing in Malaysia. I wouldn’t call it a rally. I would say that share prices are coming off from the year’s low. Foreign selling has abated and, based on the grounds of valuation, it looks cheap,” he says.

Nevertheless, many agree that it will only be after the state elections before there is more clarity on the direction of the stock market.

“Right now, it is sentiment-driven,”says an observer. “Recent talk of a ‘green wave’ has put many investors on the sidelines. They are waiting to see what happens on Aug 12. If it is status quo, it will be a good boost for the stock market.”

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