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Thrifty spending to prevail in 2020

TheEdge Tue, Jan 07, 2020 09:01am - 2 months ago

KUALA LUMPUR: Economists are neutral on the prospects of the consumer sector in 2020 as data shows Malaysians are becoming more cautious about their spending.

The Malaysian Institute of Economic Research’s (MIER) Consumer Sentiment Index contracted by nine points quarter-on-quarter to 84 points in the third quarter of 2019 (3Q19), marking the lowest below optimistic threshold level since 4Q17.

“MIER noted that the domestic spending momentum would deteriorate in the near future due to anxieties over rising living cost, a sluggish job outlook coupled with limited shopping plans due to weakening purchasing power,” AllianceDBS said in a research note dated last Friday.

Retail Group Malaysia (RGM) recently cut its annual retail sales growth forecast for 2019 from 4.4% to 3.7%, in view of a disappointing growth of 1.8% in 3Q19 and the expected weak growth expected in 4Q19. This was RGM’s third revision since the beginning of 2019.

For 2020, the group is projecting a 4.6% growth for retail sales, although it noted that the year will remain a challenge for the Malaysian retail industry.

“Externally, trade disputes between countries are not expected to end soon. Internally, economic policies that can stimulate consumers’ spending are limited in the near term,” RGM said in its Malaysia Retail Industry Report released recently.

Despite the low consumer sentiment as measured by MIER, AmInvestment Bank said it expects healthy consumer spending to be sustained on the back of a steady labour market and stable inflation. The bank has projected private consumption to grow at 6.9%.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie is projecting private consumption growth to slow to 6.7% in 2020 from an estimated 7.2% in 2019.

“The estimation is slower compared with an average of 7% in the past-five years,” Lee told The Edge Financial Daily.

He said wage growth is a vital factor to support consumer spending. Noting that salary increment for 2020 is expected to remain slow, he said this will continue to affect consumers’ spending power.

Private sector wage growth moderated to 3.8% in 3Q19 from 4.2% in 2Q19. Bank Negara Malaysia (BNM) said this was supported mainly by services wage growth, which was relatively sustained at 4.1% in 3Q19, versus 4.4% in 2Q19, particularly in the food and beverage, and information and communication sub sectors.

Growth of manufacturing wages however moderated to 3.2% in 3Q19, from 3.9% in 2Q19.

Lower wage growth was also observed largely in export oriented industries, particularly in the electrical and electronics (3Q19:4.1%; 2Q19: 5.1%) and petrochemical clusters (3Q19:2.2%; 2Q19: 3.1%).

The slower rate of wage increment contributed to a weaker private consumption growth of 7% in 3Q19, down from 7.8% in 2Q19. BNM noted that this was due to household spending normalising towards a long-term trend as well as strong base effects from the tax holiday spending last year.

Meanwhile, SERC’s Lee stressed the need to watch out for global economic conditions such as the Sino-US trade dispute. But with some positive developments on the trade war front, he is hopeful there will be stability of sentiments.

“For me, the sentiment stability will only kick in by the second half of 2020. Hopefully China and the US will continue to push for a trade agreement following the ‘phase one’ trade deal [announced last month],” he said.

Areca Capital Sdn Bhd chief executive officer Danny Wong Teck Meng said the outlook for the retail segment will remain weak for the next few months, as he has yet to see signs of recovery in the nation’s economy.

Malaysia’s gross domestic product moderated to 4.4% in 3Q19 from a year earlier, after 2Q19’s 4.9% year-on-year expansion.

“The retail sector is a proxy to the economy. If consumer confidence comes back, that means the economy is improving. But, that is yet to be seen,” Wong said.

Among consumer product stocks, AmInvestment Bank has a “buy” call on Power Root (fair value [FV] RM2.82), Guan Chong (FV RM3.49), Mynews Holdings (FV RM1.66), Berjaya Food (FV RM1.57) and Leong Hup International (FV RM1.04). AmInvestment Bank’s top pick for the sector is Power Root.

“We believe that Power Root will be a beneficiary of healthy consumer spending and export growth. We continue to like the company because of: i) its strong earnings recovery from streamlining of costs; ii) strong export sales growth from its planned expansion; iii) its scarcity premium for exposure to the instant coffee segment as Power Root is the closest to a pure play in the segment; and iv) a decent estimate dividend yield of 4.3% to 5.5% from FY20F to FY22,” AmInvestment Bank analyst Nafisah Azmi said in a report dated Dec 19, 2019.

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