Consumer sector likely to face lower spending

Kenanga Research believes part of the middle-income group, or the M40, may face cuts to subsidised fuel upon the introduction of a targeted fuel subsidy, thus potentially reducing their spending power.

PETALING JAYA: Kenanga Research has downgraded its stance on the consumer sector to “neutral” from “overweight” amid concerns the impending changes to the fuel subsidy system may impact the future prospects of mid-market retailers.

The research house believes part of the middle-income group, or the M40, may face cuts to subsidised fuel upon the introduction of a targeted fuel subsidy, thus potentially reducing their spending power.

“This prompts us to turn cautious on mid-market retailers. However, we continue to stay positive on consumer staples players as their target customers, the B40 group, will still fully enjoy subsidised fuel without erosion to their spending power,” it noted.

Putrajaya is expected to unveil targeted fuel subsidies during the tabling of Budget 2024 on Oct 13, to replace the existing blanket fuel subsidy.

The brokerage expects the new targeted subsidy to be effective from Jan 1, 2024.

Meanwhile, Kenanga Research believes consumer-staples companies will enjoy a respite from easing prices of some soft commodities, leading to a potential improvement in profit margins.

It pointed out that prices of some key soft commodities have been dropping in recent months including milk, wheat and corn as well as their associated freight costs. The declines have ranged from 10% to 30% year-to-date.

However, not all soft commodities have followed this trend. Prices of sugar and cocoa have seen substantial increases, surging more than 30% year-to-date.

“Robust sugar prices can be attributed to a series of factors including unseasonal rainfall in India, subpar beet crops in Europe, and drought conditions during the summer.

Kenanga Research believes the fluctuation of these key commodities prices are likely to echo in the financial performances of industry players within the next three to six months.

Amid economic stability, Kenanga Research has made a downward revision to its projections for private consumption.

Following a relatively muted gross domestic product outcome in the second quarter of 2023 (2Q23), the research firm has lowered its private consumption projection for the entire year to growth of 4.3%, down from the initial estimate of 6.1%.

“Despite the slowdown, the steady economy and a robust job market are expected to continue supporting consumer spending,” it said.

However, a sense of caution has taken hold among consumers. Kenanga Research noted the Malaysian Institute of Economic Research Consumer Sentiment Index registered a declining trend for two consecutive quarters, falling below the critical 100-point threshold.

“This trend indicates the consumer populace is adopting a more cautious spending stance, influenced by escalating inflationary pressures and augmented interest rates,“ it noted.

Similarly, the Retail Group Malaysia also revised its annual growth forecast for the retail industry in 2023 downward to 2.7%, a significant decrease from the previous estimate of 4.8%.

This revision comes following a disappointing performance in the 2Q23, which saw 4% growth within the retail sector, attributed to subdued sales during the Hari Raya season and a high-base effect.

Kenanga Research has named Dutch Lady Milk Industries Bhd, Fraser & Neave Holdings Bhd and MR DIY Group (M) Bhd as its top picks within the sector.

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