Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on January 22, 2019

KUALA LUMPUR: Industry experts are positive the consumer sector will remain resilient on the back of favourable government policies and a stable macroeconomic outlook despite the slower economic growth prospects in 2019.

“The economy is slowing down, but it is still growing. We are not in the recession or facing any very bearish situation,” said Areca Capital Sdn Bhd chief executive officer Danny Wong.

Noting that the optimism towards the consumer sector has been picking up since last year, Wong expects the sentiment to continue improving in the first half of this year.

The positive indicators, he said, included consumer-friendly government policies, stable economy prospects, foreign fund inflow and the lag effect in the impact of the transition from the goods and services tax (GST) to the sales and service tax (SST).

He said there will be more money circulating in the market under SST system that could spur consumer spending.

Noting that the US equity market is looking toppish at the current level and that US interest rates are seen peaking this year, Wong added: “I foresee foreign funds will flow back into the emerging markets, including Malaysia, which may support the consumer sector.”

Aminvestment Bank Bhd analyst Nafisah Azmi, who is equally positive about the consumer sector outlook, is maintaining an “overweight” call on the sector.

“We believe the positive trend in the consumer sentiment will be sustained as consumers become more confident of the government with expectations of a more rakyat-centric government policies, better governance and transparency,” Nafisah said.

She said the latest consumer-friendly initiatives by the government have contained the problem of rising cost of living and effectively put more money back into the pockets of consumers.

These initiatives, which include the re-introduction of petrol subsidy, capping of the electricity tariff and the introduction of public transport subsidies, will provide fuel to boost spending.

Nafisah added that the substitution of GST with SST is net positive to consumers as the SST has a narrower scope compared with the GST.

RHB Research Institute analyst Soong Wei Siang also expects the consumer sentiment to stay positive in view of the healthy wage growth, robust job market and the populist measures introduced by the government.

“Domestic spending should remain resilient due to the abovementioned factors, while inflation is also expected to be moderate. That said, we do not foresee major changes in consumer spending,” Soong said in an email reply.

On the macro outlook, Soong opined that the favourable commodity prices and exchange rate would translate into lower raw material costs for the food manufacturers, while strong consumer sentiment would encourage higher discretionary spending, benefitting the retail-based consumer companies.

“The increase in minimum wages is positive in supporting consumption, but on the flipside, it inflates wage costs and pressures profitability if the affected companies are not able to pass on the higher costs,” he said.

Notwithstanding the resilient consumer sector, Soong said, consumer spending may not see strong growth this year due to factors such as the floating fuel price and lower income within the rural areas as a result of subdued commodity prices.

Fundsupermart Research analyst Jerry Lee Chee Yeong expects consumer spending to remain healthy this year, but the growth will be slower.

“Strong consumer spending that we have seen in the third quarter of 2018 is expected to taper off in the last quarter of 2018 as well as 2019 although the overall growth is likely to remain healthy,” Lee said.

“Moving into 2019, although the re-implementation of SST as well as the floating petrol price (apart from the targeted subsidy), might translate into a higher living cost, we believe with the several measures and incentives being introduced in Budget 2019, consumer spending is likely to remain healthy next year,” he added.

Heading into 2019, Wong said the given its low volatility characteristic, consumer staples sector is often viewed as a port in the storm during the volatile market conditions.

He said investors are still favouring in consumer staple stocks although the current valuations have become quite stretched across the segment.

On the same note, Lee, who has maintained a “neutral” call on the consumer sector, said investors might be buying into consumer stocks due to the continuing global uncertainties as the consumer sector is usually deemed as the defensive sector with a slightly higher dividend yield.

He observed that after the unexpected results of the 14th general election, rebalancing portfolio actions were taken by investors by moving into the more defensive consumer sector to seek higher portfolio resiliency and to benefit from the zero-rating GST.

This, he added, has subsequently led to the outperformance of the sector against the broad market.

The KLCI Consumer Product Index (KLCSU) gained 18.13 points, or 2.84%, to 656.96 in 2018, outperforming the benchmark FBM KLCI, which declined 92.12 points or 5.17% to 1,690.58 during the year.

On a positive note, Lee expects Bank Negara Malaysia to keep the overnight policy rate unchanged in 2019 and this serves as a positive catalyst for the consumer sector.

“We also see the possibilities of the ringgit trading higher against the greenback next year due to the less hawkish tone on US Federal Reserve System, stabilising crude oil price as well as the improving foreign direct investment into Malaysia.

“With a stronger ringgit, the purchasing power of the local consumers would not be negatively affected by the imported inflation while from the corporate perspective, the cost of imported materials will also be manageable,” Lee added.

CIMB Research has reaffirmed its “neutral” call on the consumer sector “due to the elevated valuations (particularly for consumer staple stocks), which we believe have adequately priced in the positive prospects.”

The research house said in a note issued a month ago that the valuations for consumer stocks such as Nestlé (Malaysia) Bhd and QL Resources Bhd are steep, leading to elevated risks from any earnings disappointment.

Nafisah said the potential downside risk for the consumer sector is a weakening of the ringgit versus the US dollar. She said a weaker ringgit will drag the earnings of companies that rely on imports as a source of raw material or input cost.

At the same time, she said sluggish improvements to economic fundamentals such as high operational cost and weak ringgit may not see consumers fully benefiting from savings tied to the SST reintroduction and consumer-friendly measures, thereby dampening the recovery in consumer sentiment.

Soong said the downside risks include weak consumer sentiment if the economy and job market outlooks weaken, and higher input costs arising from unfavourable commodity prices and foreign exchange.

      Print
      Text Size
      Share