Consumers forecast to spend cautiously this year

PETALING JAYA: Consumers are anticipated to tread cautiously in terms of spending as they face escalating cost of living and economic uncertainty, with projections of a modest uptick in private consumption this year.

Kenanga Research forecasts private consumption to grow 5.8% in 2024 versus 4.7% recorded in the previous year.

Meanwhile, Retail Group Malaysia (RGM) projected retail sales to grow 4% in 2024 versus 2.2% in 2023.

“We are mindful that the higher growth could be driven by higher prices rather than sales volumes,” Kenanga Research said.

The research house believed cautious consumer spending may even extend into the early months of 2025.

The research outfit said key factors contributing to the cautious sentiment include escalating cost of living due to sustained high inflation, subsidy cuts for staple goods such as chicken and rice, along with hikes in utility tariffs and the recent elevation of the sales and service tax (SST) from 6% to 8%.

“These changes are likely to elevate manufacturing costs for businesses, potentially leading to a reassessment of product pricing across various industries,” Kenanga Research said, adding that the biggest blow – fuel subsidy rationalisation – has yet to come.

While the impact on high-income earners might be minimal, Kenanga Research expects the middle-income group to experience the most significant financial strain as some of them may lose access to subsidised fuel.

“Ironically, the lower-income group might find themselves somewhat shielded from these economic pressures, thanks to ongoing government cash handouts and the continuation of subsidies, especially fuel subsidies,” it added.

Amid these economic pressures, Kenanga Research pointed out that consumer-staple companies are facing a delicate balancing act to maintain their margins.

The research house pointed out that some consumer-staple companies are poised to benefit from the recent decline in prices for certain soft commodities, which is expected to facilitate a recovery in margins.

Notably, prices for key commodities such as wheat, corn, soybean, and aluminium have been decreasing in recent months, with wheat, corn, and soybean prices dropping over 6% in the first quarter of this year (1Q24).

Conversely, Kenanga Research noted that the prices for cocoa and cotton have been on an upward trajectory, with cocoa prices soaring by 133% in 1Q24 due to reduced supplies from West Africa, exacerbated by adverse weather conditions and strong demand.

The research house also noted that cotton prices have risen by 13% in 1Q24, attributed to decreased planting and low stock levels in major production countries.

Furthermore, Kenanga Research highlighted that the Shanghai Shipping Index has witnessed a nearly 33% increase in 1Q24, primarily due to ongoing conflict in the Red Sea region.

“For companies in industries heavily reliant on cocoa and cotton, such as food and apparel manufacturers, these price hikes pose significant challenges to maintaining margins,” it said.

Given the dynamics, Kenanga Research pointed out that companies like Nestle (M) Bhd and Padini Holdings Bhd may face margin pressure in the upcoming quarters due to the rising costs of cocoa and cotton.

“Additionally, the increase in the Shanghai Shipping Index suggests that shipping costs for Padini and MR DIY Group (M) Bhd are likely to escalate, especially since a large portion of their products are sourced from China,” it added.

As consumers prioritise spending on essential items, particularly food over apparel, appliances, and furniture, Kenanga Research expects more resilient earnings from consumer-staple players compared with consumer-discretionary names.

The research outfit has named Fraser & Neave Holdings Bhd (F&N) and MR DIY as its top picks within the sector.