Go for smaller-cap, value stocks, say analysts

Investors should go for a combination of high-quality value, laggards and selected small- to mid-cap stocks as the Malaysian bourse is expected to be range-bound in the next few months

INVESTORS should go for smaller-capitalised and value stocks as the Malaysian stock market, deemed expensive currently, is expected to trade range-bound over the next few months, analysts said.

The market, which is trading at around 15 times 2010 earnings, is seen as one of the most, if not the most, expensive in the region.

"We believe the (FTSE Bursa Malaysia) KLCI becomes more vulnerable to a correction in the near term with support at 1,100 points, which is also our end-2009 target," HwangDBS Vickers Research head of research Wong Ming Tek said.

But a longer-term recovery is intact, with the index year-end target for next year seen at 1,240 points, he added.

The benchmark stock index closed at 1,171.28 yesterday, 0.25 per cent down from the previous trading day.

For the index to move up from here on, there needs to be stronger earnings upgrades and these could come from stronger-than-expected capital market activities for banks, faster progress billings on property sales, and faster margin recovery and bigger-sized contract wins for builders, Wong said.

He was positive on the outlook for banks, construction and property.

Wong, in a market strategy report yesterday, advised investors to go for a combination of high-quality value, laggards and selected small- to mid-cap stocks.

In the latter category, his top picks were Malaysia Airports Holdings Bhd, EON Capital Bhd, TRC Synergy Bhd and Alam Maritim Resources Bhd.

OSK Research, meanwhile, has raised its fair value of the index for the year to 1,144 points from 1,040, saying that corporate earnings will rebound as the economy improves.

It also upgraded its call on the Malaysian market to "neutral" from "sell into strength".

"While we continue to see the market as expensive, we note the continued liquidity and that investors are looking forward towards 2010 earnings," head of research Chris Eng said in a market strategy report for the month.

OSK Research's fair value of the index for next year is 1,265 points.

It continues to recommend trading in smaller-cap stocks in the oil and gas, rubber, steel and construction sectors.

Its top buys are Axiata Group Bhd, MMC Corp Bhd, Top Glove Corp Bhd, Mudajaya Group Bhd and Malaysian Resources Corp Bhd. It took Genting Bhd and WCT Bhd out of that list in line with its smaller-cap focus.

RHB Research head of research Lim Chee Sing believes that investors should "switch out of expensive stocks and into value stocks" that are cheap and have robust fundamentals.

These include Tenaga Nasional Bhd, AMMB Holdings Bhd, Bumiputra-Commerce Holdings Bhd, Media Prima Bhd, Perwaja Holdings Bhd and Kossan Rubber Industries Bhd.

Lim also raised his year-end target for the index to 1,210 points from 1,150 previously.