KUALA LUMPUR: Investors should remain steadfast in seeking fundamentally sound stocks despite the recent turmoil in the small-cap market, according to RHB Research.
In a note, the investment bank said while the small-mid cap space is often preferred for its higher growth prospects, a balanced pick, combined with value-focusing and growth-focused stocks is appropriate in the current environment.
As such, it emphasised that a focus on earnings quality, margins preservation, cash flow, and yield generation is paramount, especially on the backdrop of tense geopolitical conflict, cost escalations, and demand uncertainty.
RHB Research identified several industries for investors to pick from, including consumer, construction, logistics, oil & gas, property, technology, and green energy.
However, it cautioned against potential risks such as economic downturns, sustained high interest rates, earnings setbacks, liquidity constraints, political instability, and environmental, social and governance (ESG)-related concerns
.Additionally, RHB research also highlighted that momentum is currently building to an even better 2024, but top-slicing on winners that command rich valuations could prevail as the market remains topsy-turvy.
"As investors continue to shop for growth and value for alpha generation in small-mid caps, the tendency of moving to a more attractive priced (below median valuation spread) space will continue to transpire.
"Other than thematic plays on various economic blueprint and master plans, we believe laggard plays on bottoming-out stocks will likely be another major theme realised on potential cyclical recovery and sector rotational," it noted.
Reflecting on 2023, RHB Research said the market ended on a high note last year.
It said the FTSE Bursa Malaysia Mid 70 (FBM 70) recorded a growth of 12.3 per cent and the FTSE Bursa Malaysia Small Cap Index (FBM SC) recorded a growth of 9.6 per cent, outperforming the FTSE Bursa Malaysia KLCI (FBM KLCI) which registered a decline of 2.7 per cent.
This is underpinned by the strong interests in the sector in search for growth as depicted in the improved trading activities, especially in the second half of 2023 (2H23).
"The better performance of some stocks in 2H23 so far has been driven by sectors such as power, construction, and properties, thanks to the Johor thematic play and superb runs from few individual stocks.
"Moreover, certain corporate exercise, value-unlocking, and thematic play trends were also among the main drivers," it added.