INVESTORS are advised to adopt a cautious approach towards small- cap stocks amid global economic concerns and poor market sentiment.
“Be aware of hot money flowing into small caps that are not fundamentally driven, especially counters trading with high price-earning multiples, are loss making or being sought after as theme plays.
“Investors must be well-versed with the market and invest cautiously. Be quick to exit when too much money chases after selected stocks or the situation turns bearish,” said a dealer.
According to the dealer, the FTSE Bursa Malaysia Small Caps index (FBMSC) has already outperformed the FTSE Bursa Malaysia KLCI (FBM KLCI) with a more than 20 per cent rise, compared with FBM KLCI’s 0.5pc rise since January.
“Small caps have beaten the large caps in terms of price-earnings in most areas in the first half of 2014. In fact, the ‘bull run’ for small caps had begun in 2013, when the FBMSC jumped 35 per cent compared with a 12 per cent rise for the FBM KLCI.
“Hence, there are concerns that a bubble may be forming in the small cap space, especially on market talk that certain foreign funds with huge war chest have been investing in local small caps on rotational plays since the beginning of this year.”
The dealer noted that similiar to blue chips and heavyweights, the small-cap rally could end abruptly once the share price outruns earnings growth.
Meanwhile, contrarians speculate that small caps are likely to remain Bursa Malaysia’s market staple over the next few months, as the bullish trend is set to continue into the second half of 2014, said an analyst.
“The current market conditions will likely favour small-cap and penny stocks, as heavyweights begin to take a breather. We predict selective buying of small caps, and the beneficiaries are those counters with strong fundamentals. Hence, the market will still see positive performance by some small caps.
Another analyst opined that small cap stocks are not heading towards a bubble scenario in the medium-term, as the rallies have merely involved selected counters and not the broader market.
“Since local liquidity is intact, investors will continue to put money in small caps for as long as there is value. While a bubble is difficult to predict, such a scenario tends to provide the best gains at times.”