This article first appeared in The Edge Malaysia Weekly on April 10, 2017 - April 16, 2017

SAVE for those with large export earnings, consumer stocks generally saw lacklustre interest the past two years with consumer sentiment weighed down by diminishing purchasing power, higher costs and a softer job market.

While consumer sentiment is still far from bullish and analysts remain largely neutral on the sector, the KL Consumer Index is up 7% year to date. The prices of some consumer stocks have also moved up in recent months, possibly on better-than-expected fourth-quarter results.

Is it time to relook consumer stocks?

Chris Eng, the head of research, products and alternative investments at Etiqa Insurance and Takaful’s investment management division, reckons that there could be picks in the consumer sector on the back of an economic recovery.

“Although we are seeing a recovery in the economy, led by exports and the construction sector, consumer sentiment has been negative so far. But when all those factors roll in, it could result in a trickle-down effect. Consumer sentiment should recover,” he says.

It is worth noting that the Malaysian Institute of Economic Research (MIER) Consumer Sentiment Index has yet to make a comeback above the 100-point threshold level of optimism since the fourth quarter of 2014.

Nonetheless, AllianceDBS Research, for one, sees a chance for a temporary boost to consumer sentiment this year — with election goodies helping to inject some feel-good factor.

“We will not be surprised if the government announces additional stimulus measures this year to create the ‘feel-good’ factor prior to a general election,” says the research house in a report. The current Parliament will automatically dissolve by May next year if an election is not called by then.

It anticipates that the election goodies could include a higher civil servant bonus or pay rise, imposition of a cap on petrol price hikes, increased allocation of land for the PR1MA housing scheme and more high-impact infrastructure projects.

Still, these potential election goodies may not be enough to re-rate the whole sector, it says.

Inter-Pacific Securities head of research Pong Teng Siew expects the consumer sector to remain sluggish this year as consumer sentiment remains weak.

“The sector may have grown somewhat this year, but I believe it will still be sluggish,” he says.

He adds that the domestic market — which most consumer product companies are dependent on — has been slow, and inflationary pressures have been a big contributory factor to it.

Inflation in February hit an eight-year high of 4.5%, driven by the higher costs of transport and food. Bank Negara Malaysia is forecasting inflation to average between 3% and 4% this year. Comparatively, headline inflation was at 2.1% last year.

AllianceDBS Research maintains a cautious stance on the sector, premised on indicators like the MIER Consumer Sentiment Index, job vacancy data and household loan approval rates.

“The MIER Consumer Sentiment Index dipped to 69.8 points in 4Q2016 from 73.6 in 3Q2016, pointing towards sluggish recovery in consumer spending. Besides that, data on recent job vacancies and household loan approval rates remains below the historical average, which could continue to drag consumption,” explains the report.

It also does not look great for retailers when the Retail Group Malaysia’s annual retail sales growth forecast for this year was further trimmed to 3.9% from 5% previously as the association sees economic uncertainty and the higher cost of living being a hindrance to consumers.

Even so, Pong notes that Padini Holdings Bhd, Hai-O Enterprise Bhd and Zhulian Corp Bhd are among stocks in the consumer sector that have performed relatively well so far this year.

“Multi-level marketing companies like Hai-O have been doing well. I think it is the pressure on employment opportunities that has helped the companies’ sales force to grow. Zhulian’s performance improved because its overseas operations have been doing well,” he says.

AllianceDBS Research says Padini continues to ride on consumers’ down-trading, new store expansions and resilient margins.

Pong believes that consumer stocks with exposure to overseas markets should be better off than those solely focused on the domestic market because of the dented consumer sentiment locally. “I guess the best bet now is those with export markets,” he says.

Eng says he continues to like counters like QL Resources Bhd, Bison Consolidated Bhd, Padini and AEON Co (M) Bhd.

“In terms of profit, we will probably see better numbers towards the end of the fourth quarter, whereas in terms of stock performance, there should be a run-up in the stocks before that,” he says.

AllianceDBS Research’s top pick is Oldtown Bhd. It has a target price of RM3.05 on the stock.

“Oldtown remains our top pick for the sector in view of its resilient business model, established brand name, strong balance sheet, regional exposure to mitigate (potential) domestic earnings risks and attractive valuation,” it says.

While analysts remain largely neutral on the consumer sector and consumer stocks, the latter are never really out of favour. “There wasn’t really a selldown in the sector, unlike the oil and gas, and plantation sectors, so we are fairly neutral on the sector,” says Eng.

That may well offer some comfort, pending a stronger recovery in consumer spending.

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