KUALA LUMPUR: The top line of listed consumer stocks is expected to remain resilient for the remainder of 2022, underpinned by the recovery of the labour market, year-end festive sales and a gradual pick-up in tourism.
Earnings of consumer-based firms are anticipated to remain steady despite inflationary pressures, said Kenanga Research.
“We believe the M40 group will continue to maintain spending on the back of a healthy household balance sheet.”
The Bottom 40 group, however, will struggle due to depleted pandemic handouts and fund withdrawals, it said.
“We expect retail players to be able to defend their margins on a combination of better product mix and operational efficiency, coupled with the absence of major supply disruptions, especially from China.”
According to Kenanga Research, the same cannot be said for food and beverage (F&B) producers, who have not raised product prices sufficiently to offset higher input costs.
The research house noted that some F&B players are reluctant to jack-up prices for fear of demand destruction, which would result in consumers down-trading or switching to cheaper alternatives.
Kenanga Research added that this could also lead to a market share loss for the F&B players.
“F&B producers face renewed economic challenges, such as elevated input and logistics costs arising from inflationary pressures.
“Ongoing geo-political tensions are stoking further inflationary pressures as energy prices surge amid volatile supply.”
Despite the gradual softening of commodity prices in the last few months, Kenanga Research said global trends are starting to indicate otherwise.
“Global indicators show a reversed trend well into 2023, posing risks to earnings and indicating that pre-pandemic level margins are still a long way off, especially for F&B producers.”
On the local front, Kenanga Research noted that consumer consumption has been softening.
Citing the Malaysian Institute of Economic Research, it said the country’s consumer sentiment index fell 23 points to the 86-mark during the second quarter of 2022.
Kenanga Research said this was below the consumer optimism threshold.
“Citing rising prices and subdued expectations for employment and finances, sentiment appears to be softening. Year-to-date growth of total distributive trade sales as of July is hovering around the 20% mark.
“Based on our in-house forecast of 15% for the full year, growth is expected to taper off going forward as interest rate hikes and inflationary pressure squeeze consumption.”
Kenanga Research said it projects consumption to soften from August onwards due to tighter financial conditions following Bank Negara’s back-to-back rate hikes.
“On top of that, the rising cost of living and impending global recessionary pressures due to China’s persistent zero-Covid policy and Europe’s worsening energy crisis may also lead to a decline in consumer spending.
“We continue to expect growth in private consumption as the economy reopens, but overall growth is expected to normalise significantly.”
Kenanga Research cited Retail Group Malaysia (RGM), which is upbeat about the outlook of the local retail sector.
“Owing to the firm recovery of the Malaysian retail industry since the beginning of this year, RGM has revised its growth target for the retail industry to 32% year-on-year from 13% previously.”