KUALA LUMPUR: Weak corporate earnings combined with an unsteady global economy continue to cloud the outlook for small and mid-cap equities, according to RHB Research.
According to the research firm, the year-to-date (y-t-d) market liquidity improvement in the small-mid cap space early this year has been dampened once more for the past month due to lukewarm investor sentiment.
"Weak corporate earnings, coupled with an uncertain global economic environment, continue to weigh on the outlook.
"This, coupled with the lack of foreign fund flow and local retail participation, contributed to the lacklustre activities," it said in a note.
Investors should stick to a sector rotation strategy, as well as top-slicing and buying on dips in a range-bound market, according to RHB Research.
The firm thinks value stocks should be prioritised amid a period of quantitative tightening and unclear economic prospects, when profit-taking on companies with inflated values may be common.
"At the current below-mean valuations, investors should continue to take positions as constant positive alpha generation ideas do exist, even in an uninspiring market – as seen in the outperformance of our 2022 small-cap jewels.
"We advocate investors to focus on value stocks with an eye for growth, healthy cash flow generation, and dividends that will prevail through the current challenging environment," it said.
RHB Research said the sectors it favour include consumer staples, consumer discretionary, healthcare, solar-related names, non-semiconductor technology names, 3PL logistics, and oil & gas.
It said strength in the domestic economy and consumption should continue to lend support to the consumer sector as a whole.
"As for the healthcare sector, it is preferred for its defensive attributes – with an eye for growth in the recovery of the number of patient visits, coupled with robust drug procurement activities.
"Selective value buys within the technology space (for domestic-centric stocks) should do well.
"The logistics sector, on the other hand, should continue to benefit from the growing demand for 3PL services and favourable tax incentives from policymakers," it said.
Following a dismal 2022, RHB Research said both the FBM 70 and FBM SC have outperformed the FBM KLCI, thanks to the outperformance of the oil & gas, electronics manufacturing services (EMS), technology, and glove-related counters.
Meanwhile, it said the FBM KLCI was dragged down by commodity-related stocks and the sell-down from the heavyweight banking sector.
"Also, the net foreign fund outflow y-t-d and the intermittent buying from our local institutional investors also contributed to the underperformance of the FBM KLCI.
"There were 10 winners (33 per cent) out of 30 stocks in the FBM KLCI – lagging behind winners in FBM 70 (53 per cent) and FBM SC (49 per cent)," it added.