While private consumption continues to be underpinned by government stimulus packages, a low interest rate environment and a possibly consumer-friendly Budget 2021, the economy could still take quarters to return to pre-pandemic levels.
"We note that the major risk to recovery lies in the event of a second country-wide lockdown," it said.
The research house expects F&B counters to continue to recover for the rest of the year on the back of the reopening of the majority of the HORECA channels, normalising retail footfall at groceries stores as well as the revival of the domestic tourism scene.
However, retailers are faced with a more cautious recovery as consumers will be more cautious in spending and are expected to lean towards essential items such as grocery and household products.
"In the event of further global coronavirus outbreak and the domestic political turmoil taking a longer time to resolve, it would further affect the retail consumption pattern in Malaysia drastically.
"This will lead to Malaysia’s retail industry suffering from a contraction for the entire year," said Kenanga.
The last time the Malaysian retail industry recorded a negative growth rate was during the 1997-98 Asian Financial Crisis, when the market size of the Malaysian retail industry contracted 20% in 1998.
The research house reiterated its "neutral" rating on the consumer sector due to the lack of near-term catalysts.
Downside risks are expected to be relatively limited as basic consumption remains buoyed by stimulus packages and most of the the counters under Kenanga's coverage have the required balance sheet strength to tide over the ongoing crisis.
Kenanga's preferred pick in the F&B segment is Power Root while it favours Aeon in the retailer segment.
It also upgraded the sin sub-sector to "overweight" with "outperform" calls on Heineken Malaysia
and Carlsberg given their recent share price weakness."We note that the operating landscape for the breweries still remains challenged by uncertainties brought by the global pandemic (i.e. continued closure of a number of the on-trade channels, lower capacity and operating hours for eateries), as well as stricter enforcements for drunk drivers of late following some fatal accidents linked to drunk driving.
"That being said, this could be a good time to build positions on these defensive names which have a proven (pre-Covid) track record of inelastic beer demand, steady earnings growth and generous dividend payment," it said.