KUALA LUMPUR: Market analysts believe the share price of small-cap stocks traded in Bursa Malaysia will improve once the prevailing uncertainty surrounding the state elections is resolved.
The FBM Small Cap Index has gained 1.57 per cent year-to-date and 10.84 per cent over the past 12 months.
"We expect sentiment to improve when the uncertainty surrounding the state elections is effectively resolved," said Rakuten Trade head of research Kenny Yee.
Tradeview Capital Sdn Bhd vice president Tan Cheng Wen said generally, small-cap stock performance is mainly driven by retail investors on a relative basis.
The marginal increase year-to-date (YTD) in the FBM Small Cap index tracks retail investors' net buy of RM0.46 billion YTD, he added.
Tan said ultimately, large-cap performance drives sentiment, and once this picks up, investors should see some form of revitalisation in the coming months.
As small-cap stocks are dependent on the overall market's performance, a weaker ringgit which may lead to capital outflows can be a factor that impacts overall investor sentiment. Sectors such as information technology, he said, will largely experience a tailwind as they export most of their finished goods overseas and derive revenue in US dollars.
Sectors such as consumer staples, consumer discretionary, and industrials could suffer headwinds due to a hike in input costs as a result of higher raw materials that are priced in foreign currencies.
"We view it (FBM SMall Cap Index) as cheap relative to the FBM 100 index with a price-to-earnings (P/E) ratio of 10.32x versus 13.44x and relative to the historical 5-year average P/E of 28.99x. As such, there is potential for a further uplift in the next 12 months."
"Among the factors influencing our outlook are the upcoming state elections contributing towards political uncertainty, slower than expected recovery in China and corresponding stimulus by the Chinese government, the potential continuation of ongoing rate hikes in the US, which might cause Bank Negara Malaysia to maintain a hawkish stance," Tan added.
Malacca Securities head of research Loui Low said small-cap investors should look at building materials, construction and utility stocks once the state elections are concluded.
Low said investors should also navigate the performance fluctuations of small-cap stocks to optimise their investment decisions and look for high net cash and high dividend yield stocks.
In a report, RHB Research said market liquidity improvement in the small and mid-cap space early this year was dampened for the past few months due to lukewarm investor sentiment.
RHB Research said investors should stick to a sector rotation strategy and top-slicing and buying on dips in a range-bound market, favouring sectors in consumer staples, consumer discretionary, healthcare, solar-related names, non-semiconductor technology names, 3PL logistics, and oil and gas.