Large-cap stocks are stocks of established, well-known companies with high market capitalisation. These companies have a proven business model, a stable earnings outlook, and a long operating history. They typically have a more extensive trading volume and a significant institutional investor base due to their established reputation, which results in a more stable price performance.
Small-cap stocks, on the other hand, are stocks of newer players or companies that operate in new growth industries. These companies have a smaller revenue base but may potentially generate higher growth rates than large-cap companies. However, their earnings tend to be less predictable and more susceptible to economic slowdowns. Furthermore, with a smaller institutional investor base and lower trading volume, small-cap stocks may experience significant price swings, making them riskier investments than large-cap stocks but also provides opportunities for potentially higher returns.
Performance of FBM KLCI and FBM Small Cap Index
In comparison to the FBM KLCI Index, the price performance of the FBM Small Cap Index appears to be relatively volatile. This was particularly evident in 2020, where the small cap index experienced more significant declines during the sell-off but subsequently saw stronger rebounds during market recoveries (see Figure 1).
Figure 1: FBM KLCI and FBM Small Cap Index Price Performance (1 Jan 2013 to 31 Dec 2022)
Source: Bloomberg
Although there have been some years where the FBM KLCI Index has performed better than the Small Cap Index and vice versa, over a period of 10 years, the FBM Small Cap Index has recorded a total return (including capital appreciation and dividend) of 66.9%, which is significantly higher than the FBM KLCI’s return of 23.3%. See Figure 2.
Figure 2: FBM KLCI and FBM Small Cap Index Yearly Return
Source: Bloomberg
Assessing Stock Market Performance in 2023
At the time of writing, FBM KLCI Index, which is largely dominated by banking, plantation and oil and gas (O&G) sectors, slips close to 5% year-to-date following the sudden burst of turmoil in the global banking sector. FBM Small Cap Index, in contrast, is now up 2% year-to-date, erasing some gains made early this year.
As banking contagion worries ebb, we anticipate that the outlook for Malaysia’s economy and equity market will improve, driven by several factors. These include the accelerating recovery of laggard sectors, as China’s reopening boosts trade, tourism, and commodities demand, benefiting Malaysia as a commodities exporter. While we expect the market to remain challenging in the first half of 2023, due to rising operating costs, higher interest rates, and slower global growth, we believe the downside will be limited by the local bourse’s undemanding valuations and China’s reopening of the border.
On the economy front, Malaysia’s growth fundamentals remain encouraging, with firm domestic consumption, a stable labour market, sustained current account surplus, revival of construction projects, and expansion of primary sectors thanks to elevated global commodity prices and modest external trade activities.
Another notable factor supporting the market is the low foreign shareholding in the Malaysia equities market (Feb’23: 20.4%), which is close to its historical low of 20.1% in Aug’22. This suggests that the downside risk from potential foreign selling may be limited. Furthermore, the market seems to be confident with the new unity government led by Prime Minister Anwar, which we believe is unlikely to implement any negative policy changes, particularly relating to subsidies and taxes, as it focuses on cost-of-living issues. Additionally, as the state elections in Selangor, Kelantan, Terengganu, Negeri Sembilan, Kedah, and Penang are expected to take place in June 2023, it is unlikely that significant policy reforms will be announced.
Overall, these factors bode well for the future growth prospects of Malaysia’s economy and equity market in 2023. We continue to focus on sufficient liquidity to take advantage of market weakness with medium-term investment objectives.
Strategies for Navigating Volatility as an Investor
Whether small-cap or large-cap stocks are better for an investor depends on their individual investment goals, risk tolerance, and investment horizon. Here are some factors to consider when comparing small-cap and large-cap stocks:
- Potential for returns: Small-cap stocks have a higher potential for returns but also come with higher risks due to their volatility and the potential for business failures. Large-cap stocks may have lower potential returns but also offer more stability and a track record of successful performance.
- Risk tolerance: Investors with a higher risk tolerance may choose to invest in small-cap stocks. In contrast, investors with a lower risk tolerance may prefer the stability of large-cap stocks.
- Market conditions: During periods of market strength and positive investor sentiment, small-cap stocks may outperform large-cap stocks. Conversely, during market downturns or periods of uncertainty, large-cap stocks may be more resilient due to their established reputation and institutional investor support.
- Diversification: Diversification across various sectors, market capitalisations, and asset classes is an essential aspect of portfolio management. A well-diversified portfolio may include a mix of small-cap and large-cap stocks to balance risk and potential returns.
Our Investment Approach and Offerings
Our investment strategy prioritises stocks that have strong fundamental characteristics, such as resilient earnings and sustainable business models, regardless of their market capitalisation. Apart from valuation (a small-cap stock can be undervalued too and present a great investment opportunity), we place a significant emphasis on evaluating the quality of the company’s management team. We believe that competent and visionary leaders are critical to a company’s long-term success, and we only invest in businesses that we believe have capable and trustworthy management.
This investment approach allows us to navigate through the challenging periods of market volatility and unexpected events, while maintaining a focus on delivering consistent returns to our investors over the long term. We strive to build resilient portfolios that can weather the storms and provide stable growth for our investors.
Figure 3: Stock Selection Criteria
Source: PCM
Phillip Capital Malaysia offers a wide range of investment portfolios designed to meet your unique investment preferences and financial goals. Our offerings include PMART and PMA Blue Chip and Opportunity portfolios, each tailored to accommodate different investment styles and financial objectives. Our Blue Chip portfolios primarily allocate our investments towards companies with large market capitalisations, while the Opportunity portfolios predominantly invest in companies with smaller market capitalisations. We also offer both conventional and Shariah-compliant options to cater to the needs of all investors.
Our investment portfolio focuses on companies that possess strong fundamentals, including stable earnings and a promising future outlook, and are led by capable management teams. We invest stocks that are poised to benefit from the reopening of borders and the overall improvement of economic conditions.
Please click on the link to learn more or email us at cse.my@phillipcapital.com.my if you require any further information.
Disclaimer:
The information contained herein does not constitute an offer, invitation or solicitation to invest in Phillip Capital Management Sdn Bhd (“PCM”). This article has been reviewed and endorsed by the Executive Director (ED) of PCM. This article has not been reviewed by The Securities Commission Malaysia (SC). No part of this document may be circulated or reproduced without prior permission of PCM. This is not a collective investment scheme / unit trust fund. Any investment product or service offered by PCM is not obligations of, deposits in or guaranteed by PCM. Past performance is not necessarily indicative of future returns. Investments are subject to investment risks, including the possible loss of the principal amount invested. Investors should note that the value of the investment may rise as well as decline. If investors are in any doubt about any feature or nature of the investment, they should consult PCM to obtain further information including on the fees and charges involved before investing or seek other professional advice for their specific investment needs or financial situations. Whilst we have taken all reasonable care to ensure that the information contained in this publication is accurate, it does not guarantee the accuracy or completeness of this publication. Any information, opinion and views contained herein are subject to change without notice. We have not given any consideration to and have not made any investigation on your investment objectives, financial situation or your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any persons acting on such information and advice.
