SINGAPORE (Jan 7): RHB Research is keeping its “neutral” call on the small-mid cap sector amid US-China trade tension that could continue to weigh on the market.

“A potentially positive 2019 will hinge on the outcome of the trade talks between the US and China. If an agreement cannot be reached, the outlook will worsen, and a further correction for all markets is likely,” says lead analyst Jarick Seet in a report on Monday.

According to Seet, Singapore stocks have been significantly impacted since March last year, when US President Donald Trump initiated the possibility of a trade war against China and other key deficit trading partners.

“This led to a challenging 2018 for the markets and small-mid cap stocks,” says Seet. “Until resolution is reached, we remain ‘neutral’ on the sector, while being upbeat only on companies with strong growth drivers and sound balance sheets.”

With the markets expected to be challenging this year, coupled with rising interest rates, Seet highlights the need to pick companies with “good growth and strong fundamentals, on top of a net cash balance sheet to buffer against any impact from the rise in interest rates, as well as attractive dividends to reward shareholders.”

The research house’s top picks among the small-mid caps include HRnetGroup and Silverlake Axis.

RHB has a “buy” call on HRnet with a target price of $1.18.

“We believe HRnet will likely make more acquisitions in the near future, and focus on new markets while growing its presence in North Asia,” says Seet. “We also expect a better FY19, on stronger growth in North Asia and Singapore across all segments while the effect of the 88GLOW Plan should have a full-year effect on PATMI.”

As at 1.30pm, shares in HRnet are trading half a cent higher at 79 cents.

Meanwhile, Seet says Silverlake could see a stellar year ahead, after reporting revenue and PATMI growth of 36% and 70% respectively in 1Q19.

“The next few quarters should likely be stronger, as it continues to draw down from its existing 320 million ringgit orderbook – with both licensing and project services revenue projected to deliver strong growth,” he says. “Earnings from the acquisition of Xinfotech will also kick in 2H19.”

RHB has a “buy” call on Silverlake with a target price of 65 cents.

As at 1.30pm, shares in Silverlake are trading 2 cents lower, or down 4.7%, at 40.5 cents.