This article first appeared in Capital, The Edge Malaysia Weekly on September 9, 2024 - September 15, 2024

WHILE the local bourse continues to see a strong inflow of foreign funds, leading to the FBM KLCI gaining about 15% year to date (YTD), lower liners have yielded relatively lower returns for investors.

During the same period, the FBM Small Cap Index has only risen 6.8%, while the FBM ACE Index is down by 3.1%. The FBM Emas Index, which is a gauge for the broader market, has gained about 15%.

The FBM Small Cap Index has declined 12.6% from its recent peak in July. Among the reasons for the lack of interest in lower liners are delayed earnings recovery, weak market confidence and the focus on new listings, analysts say.

Bloomberg data shows that for companies with a market capitalisation of between RM500 million and RM1 billion, their latest quarterly total net earnings came in at RM1.2 billion, almost double the RM616.6 million recorded in the same quarter a year ago. Quarter on quarter, their net earnings were up 5.6% from RM1.15 billion.

However, the financial performance of companies with a market cap of below RM500 million was not encouraging, as they incurred a total net loss of RM3.11 billion against a net profit of RM368.2 million in the same quarter a year ago. In the January-March 2024 period, these firms posted a total net loss of RM214.2 million.

It is worth noting that new listings such as Go Hub Capital Bhd (KL:GOHUB), KJTS Group Bhd (KL:KJTS), Farm Price Holdings Bhd (KL:FPHB) and UUE Holdings Bhd (KL:UUE) were among the top gainers YTD, with gains of 308.6%, 144.4%, 141.7% and 181.3% respectively. 

In the small-cap space, tech names that are on the top gainers list include Notion VTec Bhd (KL:NOTION), Theta Edge Bhd (KL:THETA) and HeiTech Padu Bhd (KL:HTPADU).

However, in the mid-cap space, tech companies that are among the top losers YTD are Genetec Technology Bhd (KL:GENETEC), Globetronics Technology Bhd (KL:GTRONIC), Oppstar Bhd (KL:OPPSTAR) and JF Technology Bhd (KL:JFTECH).

Danny Wong, CEO of Areca Capital Sdn Bhd, observes that lower liners in the tech space are being left behind due to the slower-than-expected recovery in their earnings.

“The delay was due to the higher-for-longer environment and lacklustre market demand. You can see some recovery in the tech sector, as demand is coming back,” he tells The Edge, noting that lower liners could pick up momentum again from a low base.

The Technology Index on Bursa Malaysia has erased all of its earlier gains, with a YTD drop of 2.1%.

As Malaysia’s economy is heading for better growth, he says big-cap stocks, especially banking counters, would continue to give decent returns.

In the mid-cap space, he advocates construction stocks. “This is the sector that can have a multiplier effect on the economy, and the key to driving the economy. Big infrastructure projects are coming in again, like the MRT3 (Mass Rapid Transit Line 3). It is just the beginning, and this will drive the growth in the construction and construction-related sectors.”

Inter-Pacific Securities Sdn Bhd head of research Victor Wan says some retail investors made substantial losses due to the massive sell-off in early August. “Many stocks have not really recovered yet. A lot of it has to do with confidence and sentiment. As a result, the liquidity in lower liners has dried up.”

Last Wednesday, global markets saw heavy selling pressure arising from a record sell-off for US chipmaker Nvidia as well as concerns over fading global growth. Despite that, the FBM KLCI was less affected by the negative sentiment, ending the day at 1,670.24 points, down 6.41 points or 0.4%.

Retail investors have been net sellers of local equities to the tune of RM4.81 billion so far this year, a stark contrast to foreign net buying of RM3.04 billion during the same period, while local institutions have also mopped up net RM1.75 billion.

For the week ended Aug 30 alone, retail investors net sold for the second consecutive week at RM245.4 million, but foreign investors net bought RM1.5 billion — the highest since March 2016.

Furthermore, Wan says weak tech earnings have dampened investor sentiment. “A lot of people were waiting for a recovery in tech stocks but it hasn’t happened. Tech firms depend a lot on China, so if China’s manufacturing is not doing well, it will definitely affect us and the region in general.

“With that being the case, I think it is quite difficult to generate what you call a good recovery run. If you look at Malaysia’s latest manufacturing PMI (Purchasing Managers’ Index) data in August, it is quite flattish. So that is also the reason why, in general, the manufacturing sector is not performing as it should, even though with the so-called new up cycle in tech demand, it hasn’t flown down to real orders yet,” he says.

Malaysia’s manufacturing PMI was unchanged at 49.7 in August, suggesting that the coming months are likely to remain soft, S&P Global Market Intelligence said on Sept 2. A reading of above 50 indicates expansion in manufacturing activity, while a reading below 50 points to contraction in the sector.

Wan highlights that foreign direct investment (FDI) in the country has been very selective, such as in data centres. As a result, only selected companies like those in the construction, mechanical and engineering sectors are benefiting from the FDI flows.

Rakuten Trade Sdn Bhd head of research Kenny Yee says the lacklustre share price performance among the lower liners could be partly due to more funds being channelled to the initial public offering (IPO) market, which has been robust in the past few years.

“Liquidity in the blue-chip portfolio will certainly improve the overall market sentiment, then we can see rotational play from big cap to others.”

So far this year, Bursa Malaysia has seen 33 new listings, with 99 Speed Mart Retail Holdings Bhd (KL:99SMART) set to be listed on Sept 9.

Overall, Wan is of the view that broader corporate earnings should improve in 2025, thus giving some hope of further gains in FBM KLCI-linked stocks. “Investors are starting to look at the 2025 numbers. After the recent results reporting season, things are looking a bit rosy in terms of the 2025 outlook. Hope it is not a flash in the pan.”

Nonetheless, he cautions that big-cap stocks’ valuations appear to be very toppish at this stage. The FBM KLCI is trading at a price-earnings ratio of 16.04 times.

The total net earnings of the FBM KLCI’s 30 component stocks in 2Q expanded 22.3% to RM18.7 billion, up from RM15.3 billion a year ago. Compared to 1Q, the total net earnings were up 7.2%.

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