Consumer sector is still a good value buy

Overall, the Malaysia consumer sector remain resilient throughout 2022

by IFAST RESEARCH TEAM / pic TMR

2022 was a year unlike any other. Starting from the Russia-Ukraine War to persistently high inflation, to the ramping interest rates which saw many central banks hike their interest rates to decades-high levels.

However, the consumer stocks navigated through the global uncertainty relatively smoothly, as shown from the 4.6% positive total return (in ringgit terms) for the calendar year 2022 while both the KLCI Index and the FTSE Bursa Malaysia EMAS Index fell -0.65% and -1.77% respectively. The reason behind this was the reopening of Malaysia’s international border in April, which boosted domestic consumption as well as consumer confidence. As such, this provided much-needed support to the Bursa Consumer products and services sector to weather through global macroeconomic uncertainty.

Moving forward, our views toward the two segments within the consumer sector were mixed. We think that the consumer staples industry sees brighter days ahead due to supportive measures from the government in the newly retabled budget 2023 and its defensive nature of being able to navigate through global uncertainty amid rising recessionary fears and a slow-down in global economic growth. Whereas for the consumer discretionary sector, we remain cautious given its cyclical nature, meaning that slow economic growth would affect demand for such products or services.

Retabled Budget 2023: A Booster Jab to Consumer Staples

In Budget 2023, the higher allocation of cash is expected to have a positive impact on the consumer staples sector. The budget is centred around the people and aims to provide subsidies and discounts to aid a sustainable economic recovery. The income tax reduction and financial assistance targeted at the Bottom 40% (B40) and Middle 40% (M40) income groups are expected to be instrumental in supporting the domestic consumer sector, which is facing rising inflationary pressure. Prime Minister Datuk Seri Anwar Ibrahim said the adjustments are expected to reduce the government’s tax collection by RM900 million and benefit specifically the M40 but the 2% higher income tax on the top 20% (T20) group is expected to generate an incremental tax revenue of close to RM11,000 per person to the government.

Nevertheless, the luxury tax proposed in Budget 2023 will serve as a headwind for the consumer discretionary sector. Yet, we believe the relaxation of restrictions and increased incentives in the tourism sector will offset the impact of the new tax regime.

Consumer Staples: Remain Resilient in the Thunderstorm We expect the consumer staples sector to outperform the consumer discretionary sector, as they are more likely to navigate through market volatility relatively resiliently given their nature of being defensive. Consumer staples, which mainly consisted of producers or manufacturers that supplied goods that were demand-inelastic, such as necessities, were likely to remain resilient given their stapled nature and product stickiness, which gave rise to their abiliity to raise product prices in this rising cost environment without hampering demand.

However, we expect heightened operating costs to pose some headwinds for the segment. In December 2022, the Malaysia government announced it would increase electricity tariffs for export-oriented multinational corporations, while domestic small and medium-sized enterprises (SMEs) and businesses involved in agricultural and food production will not be subjected to any hikes in 2023. This will cause a lot of large, listed manufacturing companies to face higher electricity costs in 2023. Other than that, the adjustment of the tax system in the newly re-tabled budget 2023 will provide mid- to low-income individuals with more discretionary spending. In spite of the theory of income elasticity of demand, we think that the targeted population that benefited would see an increase in demand for both normal and inferior goods. Also, given the higher income tax rate on high-income bracket individuals and the imposition of the luxury tax, this will further benefit consumer staples players through potential consumer down-trading.

Consumer Discretionary: Bumpy Road Ahead

We expect a challenging road ahead for the consumer discretionary sector on the back of mounting headwinds such as slower global economic growth, rising inflation and global interest rate upcycle. Consumer discretionary goods, which are considered non-essential or luxury items and are typically purchased by consumers when they have extra disposable income.

Firstly, the revised budget for 2023 was not supportive to the consumer discretionary sector. Aside from the 2% higher tax levied on higher-income individuals, which reduces their discretionary income, the implementation of the luxury tax will also place constraints on the sector. The luxury tax (still under discussion on details), was supposed to target items such as branded watches and fashion items starting this year to diversify its tax income from the wealthy.

Other than that, slower global demand amid recessionary fears will have a bigger impact on the consumer discretionary sector as compared to the consumer staples sector, where the forecast EPS for some of the major consumer discretionary players has been downgraded compared to companies in the consumer staples segment (upgraded) in 2023. Also, the lower electricity subsidy would affect the consumer discretionary sector as well.

While in this segment, we are bullish on “affordable luxury” companies which focus on the mid-income segment, where demand for their products is relatively inelastic compared to other consumer discretionary items, which are likely to continue with stable consumer demand from medium-high income target markets.

Despite a relatively strong performance in 2022, there is still room for upside for the Bursa Consumer Products Index as valuations remain attractive. From Figure 1, we noticed there has been a mismatch in the current price and earnings per share.

Moving forward, we think that the supportive measures by the government in the revised budget 2023 will benefit the consumer staples sector, which represents a larger portion of the overall consumer sector, as well as the recovery of the domestic economy, which will act as a tailwind towards the sector.