KUCHING: Despite a quarter-on-quarter pick-up in private consumption growth in fourth quarter 2016 (4Q16), leading indicators point to subdued recovery for the consumer sector.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) in its industry focus remained cautious on the overall consumer sector given that leading indicators such as Malaysian Institute of Economic Research (MIER) Consumer Sentiment Index (CSI), job vacancies data and household loan approval rate all point towards subdued recovery.
“With the adverse impact of the Goods and Services Tax (GST) implementation fading, we have observed that recovery in consumer spending remains slow, uneven and fragile,” it said in a report.
“We believe that the slow pick-up in consumer spending has been dragged by higher cost of living contributed partly by removal of subsidies by the government, slowing economic growth momentum, concerns over job prospects, ringgit volatility, and high household debt.”
To note, CSI statistics released by the MIER dipped q-o-q to 69.8 points in 4Q16 – compared with 73.6 in 3Q16 – pointing towards sluggish recovery in consumer spending.
Besides that, data on recent job vacancies and household loan approval rates remain below the historical average, which could continue to put a drag on consumption.
AllianceDBS Research further pointed out in another report that the Retail Group Malaysia (RGM) also slashed its annual retail sales growth forecasts for 2017 from the initial five to 3.9 per cent, citing low consumer confidence, dampened by weak economic environment and concerns of job prospects.
On potential election goodies, the research team believed that consumer sentiment is so low that goodies would likely support consumers’ spending power.
“We maintain that one theme to watch this year will be potential election goodies. The government is poised to hold a general election (GE) latest by May 2018 and the market is anticipating that the election will take place this year.
“As such, we will not be surprised if the government announces additional stimulus measures this year to create feel-good factors prior to the election,” it opined.
It noted that anticipated potential election goodies include higher civil servant bonus and/or even pay rises, imposition of cap on petrol price increase, increased allocation of landbank for PRIMA housing scheme, and more high impact infrastructure projects.
“While potential election goodies could temporarily create feel good sentiment, we do not expect this to be a significant re-rating catalyst for the sector,” it commented.
All in all, despite stronger than expected 4Q16 results, AllianceDBS Research maintained its cautious stance on the sector, as earnings prospects are expected to remain weak.
This is due to continued slow recovery in consumer spending, weakening ringgit that will inflate the cost of imported materials, higher minimum wage effective from July 2016 to add on to cost pressures, and an increasingly competitive operating environment and weak consumer market may restrict companies’ ability to pass on the rising cost.
“While we remain cautiously optimistic that consumer spending will continue along its recovery path this year, we do not foresee any significant re-rating catalysts for the overall sector at this juncture,” it added.
With no significant catalysts on the horizon, AllianceDBS Research said bottom up stock picking remained the top strategy for investors to generate alpha returns.