This article first appeared in The Edge Financial Daily on September 18, 2018

KUALA LUMPUR: Valuations of consumer stocks jumped to near historical highs after the 14th general election as consumer sentiment rebounded, and as Malaysians got to enjoy an unprecedented three-month tax holiday while the new government prepared the country’s transition to a new tax regime with the zero-rating of the goods and services tax (GST).

But going forward, the anticipated dampening of consumer sentiment as the new sales and service tax (SST) regime which kicked off on Sept 1, in addition to a lack of catalysts and uncertainties in the stock market, may see investors shift to other sectors.

Already, analysts contacted by The Edge Financial Daily are of the view that the retail and consumer sector valuations are looking "stretched".

“Now that September is upon us and the SST regime has kicked in, consumer behaviour will normalise and is dependent largely on consumer expectations for wage growth, ability to consume, as well as price levels of goods and services [inflation],” said Geoffrey Ng, investment adviser and director at Fortress Capital Asset Management (M) Sdn Bhd.

Not only does Ng expect consumer confidence to be lacklustre in the next few quarters as he believes Malaysians will continue to be challenged by debt servicing responsibility as household debt-to-gross domestic product ratio remained stubbornly high at 84% (as recorded in 2017), he said government-led fiscal spending is also expected to take a backseat in the foreseeable future.

Hence, he expects consumer and retail sector companies to report flat to weaker earnings in the next few quarters, weighed by slowing household consumption and a weaker ringgit, with the latter resulting in more expensive imported consumer goods.

Frank Lin, a dealer’s representative at Hong Leong Investment Bank Bhd, said retail and consumer stocks are not in a good position now as they have jumped a lot over the last few years.

He said fast-moving consumer goods stocks such as Nestle (M) Bhd and Fraser & Neave Bhd (F&N) have run ahead of the FBM KLCI. Over the past year, the Bursa Malaysia Consumer Products Index (BMCPI) had risen 15.56% to 724.73 points from 627.12 points, while the FBM KLCI was up just a marginal 0.98% to 1,803.76 points from 1,786.33 points.

Notably, the BMCPI hit its all-time high of 745.02 points on Aug 23, after growing 9.61% from 679.69 points on May 8. In contrast, the FBM KLCI weakened to its one-and-a-half-year-low of 1,663.86 points on July 6, after sliding 9.89% from 1,846.51 points on May 8.

“Retail stocks are not in a sweet spot,” said Lin, who noted that the new government’s decision to phase out BR1M (1Malaysia People’s Aid) — which he said has been adding “a few billion ringgit worth” of spending power to consumers — will affect retail sentiment.

Consider other related sectors

While MIDF research head Mohd Redza Abdul Rahman agrees that consumer stocks are looking “pricey” now, he said that should not be the reason to avoid the sector.

Instead of considering pure consumer stocks, he suggests that investors consider related consumer discretionary spending sectors like aviation and the supplier of raw materials like cans or packaging companies.

“Despite attracting SST for domestic air tickets, we don’t think there will be a decline in travelling in the domestic segment, let alone overseas travelling,” said Mohd Redza, adding that Malaysia Airports Holdings Bhd is still seeing positive passenger growth, despite challenging fuel prices, and likewise for AirAsia Group Bhd.

“As far as consumer discretionary spending, particularly in the retailing segment, investors should also look at logistics companies, especially with the increase of online shopping,” said Mohd Redza.

Another thing to consider are laggard consumer stocks that still have decent dividend yields, he said. And keep a close eye on any “price correction” events that could present buying opportunities amid the overall “jittery” market sentiment caused by external factors, Mohd Redza added.

But Areca Capital Sdn Bhd chief executive Danny Wong Teck Meng thinks it is “too late now” if investors are only starting to look at consumer stocks.

Nevertheless, he maintained that consumer stocks are deemed more sustainable compared with other sectors, which are cyclical, said Wong, hence these stocks are likely also dividend yielders, translating to less volatile share prices.

Additionally, Wong said investors tend to look at at least one or two consumer counters come year end due to seasonal spending patterns.

Meanwhile, stocks that will remain in favour are those least affected by the new SST and are export-oriented.

An analyst from a local research house, who declined to be named, said stocks like shopping malls like AEON Co (M) Bhd and ones with the least exposure to the imports market, will likely stay in focus.

Ng said, he sees consumer staples, beverage and tobacco subsegments remaining relatively defensive since these are generally able to pass on costs related to SST and rising cost of imported raw materials to consumers.

He added that those with a diversified export market would be able to benefit from the ringgit’s weakness.