Good cancels out bad in consumer sector review
On the other hand, while consumer sentiment continues to linger a low base from the lacklustre job outlook and rising living expenses, we expect consumer spending to sustain from resilient private consumption with hopes of higher public with several major national events across the horizon.
KUCHING: Analysts remain neutral on the consumer sector in Malaysia as they expect challenges ahead but key industry players could also stay resilient due to several upcoming national events.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) pointed out that that while input costs are expected to increase following the recovery of commodity prices, companies are also expected to improve operationally as a means to negate a certain degree of margin compression.
“On the other hand, while consumer sentiment continues to lingeralowbasefromthelacklustre job outlook and rising living expenses, we expect consumer spending to sustain from resilient private consumption with hopes of higher public with several major national events across the horizon,” the research team added.
Among key events to look out for are this year’s 29th SEA game and Malaysia’s 60th Independence Day Celebration.
Meanwhile, it pointed out that the KL Consumer Index (KLCSU) demonstrated an admirable year to date (YTD) return of 4.5 per cent, closely in line with the benchmark KLCI’s YTD return of 4.6 per cent.
Nevertheless, it said, “The Malaysian Institute of Economic Research (MIER) presented the fourth quarter of 2016 ( 4Q16) consumer sentiment index was at 69.8 pts (down 3.8 pts q-o-q), being the lowest recording for 2016.
“The global survey conducted by Nielsen presented similar findings as Malaysia scored 84 pts (down five pts q-o-q) from their scale.
“Much of the pessimism could be attributed by the dampened job outlook, rising living expenses and shrinkage in spending power as our exchange rates have yet to show signs of improving,” it said.
However, Kenanga Research pointed out that as the yearend periods used to be a period of heavier consumer spending for discretionary items and recreational expenses, it believed a dwindling in spending during this time could demonstrate a larger impact against statistical norms.
As for commodity prices, it explained that while food manufacturers had enjoyed a stint of soft commodity prices in the last two years, the progressive price normalisation had begun to reflect in the expanding input costs for food and beverage (F&B) players without hedging practices.
“Though milk powder and cocoa prices seemed to have shown a steep decline in the last recent months, we anticipate little meaningful costs easing for food manufacturers as overall raw material prices seem to be maintained on an uptrend.
“Coffee and sugar prices, on the other hand, have not shown a reversal on its price movements. Thus forth, we believe food manufacturers will continue concentrating on efforts to enhance operational processes to make up for the loss in margins from higher costs while keeping selling prices stable as to not discourage consumption of their products,” it added.
As for the anti- profiteering mechanisms, the research team believed that the regulation would persist.
To recap, the Ministry of Domestic Trade, Cooperatives and Consumerism had enforced the new Price Control and AntiProfiteering (PCAP) Regulation 2016 ( effective April 2017) on F&B and non-durable household goods and personal care products whereby price mark- ups are limited to over the products’ trailing historical three- year gross margins or in accordance to its growth trends.
“Though the general consensus from F&B players is to refrain from exercising price increase as consumer sentiment continues to be soft, we believe a prolonged state of cost absorption may be detrimental to their ability to pass down costs in the future as persistent low margins may be perceived as a viable normality in the eyes of the regulators.
“Biting the bullet for the time being, F&B players have been seeking other avenues to allow business to be continually sustainable for now through operational improvements while rising input costs are yet to have any severe impact.
“In addition, hedging practices on commodities will still provide some degree of leverage from soft commodity prices for an extended period in the short term,” it opined.
“As commodity prices approach a normalised state, F&B players will seek improvements to keep operations sustainable.
“In the meantime, consumer sentiment may persist at discouraging levels dampened by the poor job outlook and weaker spending power. Several new regulations were introduced to curb price increases and also to better streamline organised sales events by retailers.
“Nonetheless, we believe the market may still be sustained with the continued resiliency of private consumption and anticipation of higher public spending. In addition, companies with sizeable export exposure may demonstrate promising results as they benefit from stronger foreign currencies and more vibrant export demand,” Kenanga Research commented.
Kenanga Research