This article first appeared in Capital, The Edge Malaysia Weekly on September 18, 2023 - September 24, 2023

THE local stock market has gained traction over the past two months, with the focus mainly on big- and mid-cap stocks. Since touching a low of 1,377.67 points in early July, the benchmark FBM KLCI has risen 5.5%, while the FBM Mid 70 Index has added 4.8%.

The ACE Market, however, has inched up only 2.3% since touching a low of 5,030.30 points in June. Will the optimism in the broader market spill over?

Analysts believe investor interest in the broader market needs to grow further and the momentum must be sustained before the ACE Market can benefit. Nevertheless, they acknowledge that economic uncertainties remain a hurdle.

Areca Capital Sdn Bhd CEO Danny Wong says a much stronger and broader market rally has to occur to have knock-on effects on the small-cap stocks. But it also depends on the fundamentals of each counter amid a challenging business environment.

“As investors think the 3Q results may not be able to recover yet [given the underwhelming results in 2Q], it will likely take some time before they relook at these small-cap stocks,” he tells The Edge.

“In short, there’s still room for some big- and mid-cap stocks to run first. This is the so-called risk-reward play. When most of their stocks have risen, then the investors will look for second-tier stocks.”

Kenny Yee, head of research at Rakuten Trade, agrees. He says the Main Market needs to sustain its trading volumes before any spillover effect can be seen in the ACE Market.

“So far, there have been signs that the broader market is warming up. But because of external volatility, the volume has shrunk again. So, we need to see sustainable higher volumes traded first on the Main Market before we can expect some movement in the ACE Market,” he explains.

A look at the best-performing ACE Market stocks reveals that these are dominated primarily by new listings this year, including TT Vision Holdings Bhd, NationGate Holdings Bhd, Wellspire Holdings Bhd, Oppstar Bhd, DC Healthcare Holdings Bhd, Autocount Dotcom Bhd and Edelteq Holdings Bhd.

Some of the IPOs even attracted institutional funds, mainly because their valuations are not that demanding, says Wong. On the recent rally in property stocks, he notes that the counters were significantly underbought.

“When investors see some light at the end of the tunnel, the stocks appear to be attractive in terms of valuations. It’s not really a rotational play, it’s more of a catch-up play,” he observes.

Looking ahead, Wong sees good opportunities in the interest rate play. “When the interest rate cycle pivots, sectors that were hit by rising interest rates will make a comeback, such as technology, REIT and dividend stocks.”

Overall, he believes the uptrend on the local bourse will continue into the next year.

Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong says the current market sentiment in the local bourse is fuelled by thematic plays, with investors taking a cautious trading stance in view of the slowing economy.

“Recent interest witnessed in Johor-related stocks was largely lifted by the government’s intention to revive the development of the Iskandar region. The stocks on the ACE Market, however, are largely not in the property and construction sectors, hence there was little correlation in terms of interest,” he adds.

Yong expects a continued rotational thematic play, as long-term visibility remains cloudy in view of the slowdown in the regional economy and the hawkish stance adopted by major central banks. “Investors tend to look for short-term trading ideas,” he says, noting that the property and construction sectors may continue to attract interest as the government is expected to roll out infrastructure projects after the recent state elections.

He adds that renewable energy-related stocks could also attract interest as the government continues to promote the energy transition.

According to Yong, the technology sector could present some trading opportunities as well, as market interest is expected to rise when inventory levels deplete. Other supporting factors include the peaking of the US interest rate cycle.

He notes that the US Federal Reserve’s policy stance will continue to affect global market sentiment. “The policy is likely to be data-dependent, hence economic data such as inflation and labour market conditions will be closely monitored.”

On the home front, Budget 2024 will be in focus as investors wait to see if fiscal stimulus can lift domestic demand.

Notwithstanding the external issues, Rakuten’s Yee stresses that the local market is still well supported by local institutions and foreign funds.

“Politically, it’s more stable now. So, funds are more eager to look at the local market,” he says.

According to Bursa’s data, trading volume on the Main Market rose to 57.32 billion units in August from 50.2 billion in July. On the ACE Market, trading volume expanded to 14.6 billion units in August against 13.8 billion in July.

Trading value-wise, the Main Market achieved RM43.3 billion in August versus RM35.9 billion in July, while the ACE Market rose to RM4.8 billion in August from RM4.7 billion in July.

Foreign investors turned net sellers on Bursa for the third straight week, with outflows at RM27.7 million for the week ended Sept 8. Nevertheless, the outflows were slower than the RM113.5 million in the previous week, according to MIDF Research. Local institutions, however, maintained their net buying pace for the fourth consecutive week, amounting to RM60.6 million.

Local retail investors were even more cautious as they continued to offload shares for the ninth consecutive week, resulting in RM33 million worth of net selling.

Yee is pinning his hopes on the construction sector for more continuous news flow to ensure sustainable market interest. Citing the revival of the Melaka Gateway project as an example, he says this is a good start for the construction industry. “If the government announces more mega projects, then it will certainly boost the construction industry … Investors have to wait for the news flow to emerge.”

Last week, KAJ Development Sdn Bhd announced that the RM43 billion Melaka Gateway mega project is being revitalised following the approval of the guidelines and regulations and the support of the federal and state governments.

Once mega projects kick in, it will create a spillover effect on industrial products, says Yee. “Construction has the highest multiplier effect on the economy as it goes across the board.”

He expects banking and telecommunication stocks to be key supports for the FBM KLCI for the rest of this year. “If you look at the consensus [target] prices for banks, there is still a lot of upside compared with current prices,” he says.

On the ACE Market, SMRT Holdings Bhd is the best-performing counter with a gain of more than 400%. The main catalyst, of it being a pure tech firm following a restructuring exercise to carve out its education business, has already been priced in.

SMRT reported a net loss of RM69.32 million for 2Q2023 following the disposal of SMR Education Sdn Bhd to Cyberjaya Education Group Bhd for RM49.5 million. For 1Q2023 quarter, the group posted a net profit of RM44.45 million.

Other notable mentions are Catcha Digital Bhd and Volcano Bhd. Catcha Digital’s share price started to rebound in July ahead of its announcement on its exit from the Guidance Note 2 (GN2) status at end-July. It raised RM29.7 million from its rights issue to fund its business expansion plans, which include developing technology solutions and software for the government and public sector in line with the Malaysia Digital Economy Blueprint. Having closed at 55 sen last Wednesday, the stock is up 208% year to date (YTD).

Nameplate and plastic injection mould parts maker Volcano has delivered an impressive share price performance with a gain of 83.5% since early this year. This came after it posted a net profit of RM1.27 million in 2Q2023 versus RM500,000 in 1Q2023.

It recently raised RM15.1 million from its private placement exercise involving 16.63 million shares at 91 sen apiece. Its share price had surged 83.5% YTD to close at 89 sen last Wednesday.

Among the new listings, TT Vision, NationGate and Wellspire have outperformed, with gains of more than 200% each.

TT Vision is a Penang-based automated test equipment (ATE) manufacturer, with a diversified global client base in the light-emitting diode (LED), semiconductor and solar industries. The optoelectronics and integrated circuit segments collectively make up 60% of its order book.

Electronics manufacturing services provider NationGate is projected to achieve stronger 2H2023 results, which prompted Kenanga Research to raise its target price for the stock to RM1.75 last month from RM1.40 previously. This is on the back of a production ramp-up for existing customers and the onboarding of new Chinese customers in the artificial intelligence-related fields.

Bloomberg data shows that the consensus target price for NationGate is RM1.79, suggesting an upside potential of 34.6% compared with its closing price of RM1.33 last Wednesday.

Meanwhile, Wellspire, which is involved in the distribution of consumer packaged foods, posted a net profit of RM1.94 million for 1HFY2023 ended June 30, up 81.3% from the RM1.07 million in the previous corresponding period. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.