OPTIMISTIC OUTLOOK: Margin expansions for the consumer sector on the back of a decrease in commodity prices and a strengthening of consumer sentiments post a peak in CPI.
KUCHING: Softening commodity prices along with peaking inflation are set to be the leading catalysts for the earning’s upside within the consumer’s sectors going forward into the second half of 2011 (2H11).
In a recent phone interview with The Borneo Post, AmResearch Sdn Bhd (AmResearch) analyst, Low Soo Fong opined that should most commodity prices experience a slowdown towards the end of 2011 and as raised average selling prices were sustained, there would be room for a notable increase in margin expansions.
Global commodity prices according to Low had fallen off its peaks to a weak recovery in the developed world and a slower growth in the emerging markets. This was evident in the case of China, the world’s largest importer of various commodities which to date had posted a slower gross domestic product (GDP) growth of 9.5 per cent for the second quarter of 2011. GDP in the previous quarter grew at 9.7 per cent.
Additionally, the June 2011 statistics garnered from the World Bank noted a decrease of 1.7 per cent in energy prices while agriculture saw a slowdown of 0.7 per cent. Metals and minerals on the other hand edged down by 1.2 per cent.
The results were in contrast to the first half of 2011 where both non-energy commodities and agriculture rose at three percentage points each while metals and mining was up by one per cent.
“Depending on how meaningful the price correction is, we could well see a repeat of 2009 when companies reported strong margins across the sector.
“With the exception of sugar and milk, other key input costs such as corn, wheat, cocoa and tapioca starch are trending downwards at five per cent to 19 per cent off respective year-to-date peaks,” Low pointed out.
Moving ahead, Low stated that the absence of intensified worries over high inflation, coupled with higher levels of disposable income, should provide support to increased consumption levels.
“As we have seen, Malaysia’s Consumer Sentiment Index (CSI) in the first quarter of 2011 slipped as Consumer Price Index (CPI) edged higher to 2.8 per cent which is a 0.8 percentage points increase quarter-on-quarter.
“Conversely, we would expect consumer sentiment to strengthen on the back of higher purchasing power post a peak in CPI,” Low pointed out.
To recap, Malaysia had recorded an inflation rate of 3.5 per cent year-on-year for June, a record of 27-month high rate. According to Low, AmResearch’s economist had anticipated the inflation rate to inch at a further 0.3 per cent to peak at 3.8 per cent. However, the research house remained firm with its forecast of 3.5 per cent on a full year forecast.
Low emphasised that although the consumption of consumer goods and services were relatively more resilient compared with that in other industries, easing inflationary pressures can be a further boost to topline growth of consumer companies.