KUALA LUMPUR: After a stellar 16% rally last year, small-cap stocks in Malaysia have had a rough start to 2018 as investors switch to defensive blue chips ahead of the 14th general election next month.

The FTSE Bursa Malaysia Small Cap Index has dropped 14% this year, its worst start to the year since 2008. In comparison, the nation’s benchmark index has gained 4.6% – making it Asia’s second-best performing stock market – as foreign inflows near the US$1 billion mark.

“The selldown that started in March was triggered by global trade war concerns,” said Danny Wong, CEO at Areca Capital Sdn Bhd in Kuala Lumpur.

“When foreign inflows come in, naturally they would seek to be in the big cap stocks and local institutions have been supporting the market as well before the elections.”

Even as foreigners pile into the Malaysian stock market and the FTSE Bursa Malaysia KLCI Index hit a record high last week, small-cap valuations slipped to 11 times their 12-month forward earnings, the lowest level in more than a year.

Comparatively, the small cap index has gained 13% over the past three years versus a 2% gain on the benchmark KLCI index. Wong said a rebound in the small caps may still come.

“The small cap index had a handsome run for the past three years,” said Wong.

“The selling is overdone, and we believe small cap stocks would play catch up after the general elections.”