KUCHING: While the consumer sentiment is at its all-time low with consumers mainly worried about the higher costs of living, income levels and the economy, several macroeconomic indicators are pointing towards an improvement, Affin Hwang Investment Bank Bhd (Affin Hwang) says and as such, expects consumer spending to normalise towards end-2016.
Out of the nine stocks under Affin Hwang’s coverage, both brewery stocks were above expectations, four were in line and three were below expectations.
The research firm noted that overall, net earnings for consumer stocks recorded a decline of 10 per cent year on year (y-o-y) for 2015.
According to Affin Hwang, two of the most prominent headwinds that affected the consumer sector in 2015 were the implementation of the goods and services tax (GST) and the weakened ringgit against the US dollar.
The research arm pointed out that overall 2015 gross domestic product (GDP) growth slowed to five per cent (versus six per cent in 2014).
“Sentiment remained subdued, with the Malaysian Institute of Economic Research’s (MIER) consumer sentiment index showing a record low reading of 63.8 in December 2015,” it said.
On what consumers are worried about, Affin Hwang noted that consumers have been hit by higher costs of living, with headline inflation spiking to a high of 4.2 per cent y-o-y as of February 2016.
“Both MIER and NIELSON surveys highlight job security and income worries as key concerns among consumers, in addition to the current state of the economy,” the research arm said.
However, Affin Hwang believed that consumer spending will normalize towards the end of 2016 and expect the GDP to pick up from an estimated 4.3 per cent in the first half of 2016 (1H16) to 4.7 per cent in 2H16.
The research arm noted that private consumption has rebounded to 4.9 per cent as of the fourth quarter of 2015 (4Q15) from its trough of 4.1 per cent in 3Q15.
It further noted that respective unemployment and labour participation rates of 3.4 per cent and 67.6 per cent, as of 4Q15, coupled with rising wages (2015: four per cent), point to an improvement in consumer sentiment.
In view of the weakened consumer spending, Affin Hwang still has a ‘neutral’ view on the overall sector, as the research arm believed sentiment will remain muted in the near term.
“Nevertheless, we believe that sentiment has almost hit its trough and will normalise towards end-2016 with customers adjusting to the higher costs of living,” it said.
The research arm added that the KLCSU Index currently trades at 20-fold price earnings (PE) (one standard deviation (SD) above its seven-year historical mean PE of 17-fold).
Across the segment, Affin Hwang saw margin compression due to the general trend of retailers having to increase their operating expenditures through discounts and promotions to attract consumers because of the slowdown in spending in this weak retail environment.
The research arm believed that retailers will continue to experience depressed margins in the near term as efforts to increase cost efficiencies to mitigate the increase in advertising and promotional expenditure will take some time to show results.