CONSUMER stocks were not spared when the pandemic hit as the Bursa Consumer Products & Services Index fell more than -30% during the pandemic-induced sell-off in March 2020 before recovering towards end-2020.
Currently, the index is trading at around -5% below pre-pandemic levels. Likewise, earnings for consumer stocks declined -30% in 2020, reflecting the impact during the pandemic.
However, we believe that the consumer sector could be in for a recovery with some crucial near-term and long-term catalysts in place.
Consumer behaviour
The unemployment rate in Malaysia had spiked to a 30-year high of 5.3% in May 2020 before gradually improving to 4.8% by June 2021 which is still significantly higher than the pre-pandemic unemployment rate (see Chart 1). It is estimated that more than 768,000 people are still unemployed which is a whopping 255,000 more than the pre-pandemic average.
At the same time, the mean monthly salary in Malaysia fell -9% year-on-year (yoy) in 2020 as businesses were forced to undergo cost-cutting measures such as salary or working hour reductions in order to weather through the slowdown. Without a doubt, lower income levels would hamper the purchasing power of consumers.
As a result, the consumer sentiment index declined to a low of 51.1 in 1Q 2020 from the pre-pandemic level of 82.2 in 4Q 2019 (see Chart 2). The index gradually recovered to 98.9 in 4Q 2020 before falling sharply again to 64.3 in 2Q 2021 as full lockdowns came into place across the country.
Near-term catalysts
- Nationwide Vaccination Programme
The roll-out of the national vaccination programme will be the key to the strength of the recovery in Malaysia which is why the Government has ramped up the speed of COVID-19 vaccination amidst rising COVID-19 cases in Malaysia.
The Government targets to achieve 100% of the adult population to be fully vaccinated by October 2021, significantly ahead of the original plan of getting 80% of adults to be vaccinated by 1Q 2022.
Once the majority gets vaccinated, the number of COVID-19 cases would decline, and subsequently, the Government could lift the movement controls and reopen the economy.
- Reopening of lockdowns
The Government has outlined the National Recovery Plan (NRP) to take the country out of health and economic crisis caused by the COVID-19 pandemic.
In Phase 4, the Government will reopen all economic sectors by allowing social activities, interstate travel, and domestic travel. The Government targets to move into Phase 4 of the country’s COVID-19 exit strategy as soon as October this year.
We expect that the pent-up demand of consumers will be unleashed after the re-opening of the economy similar to the huge spike in consumerism upon the re-opening of MCO 1.0 (see Chart 3). Besides, we expect the demand for domestic travel to improve as people could move freely without any restriction once we reach Phase 4.
- Government stimulus package
The continuation of stimulus and assistance packages launched by the government can further support the employment market and provide a much-needed impetus to customer spending similar to the rebound in retail sales in June 2020 when the first major PENJANA package was launched (see Chart 3).
In particular, sales of motor vehicles also rebounded in June 2020 because of the sales tax exemption for vehicles under PENJANA economic stimulus packages together with the low interest rate environment.
Long-term catalyst
- Eventual recovery of the economy and labour market
From a long-term perspective, the COVID-19 vaccine is the critical factor for the country to prevail over the COVID-19 pandemic. The vaccine is crucial to create herd immunity within the society in order to allow people to move around freely and for businesses to operate without any restriction or disruption.
Improved economic and business sentiment would resuscitate the labour market by creating more job opportunities. As such, we expect the unemployment rate to improve to 3.6% by the end of 2023.
With the eventual recovery of the economy and labour market, we expect earnings for the consumer sector to recover to the pre-pandemic levels by 2023.
Takeaway: Brighter days ahead
Investor sentiment could be dampened amid the gloom and doom brought about by the pandemic. However, we are more optimistic about the outlook of the consumer sector going into 2022 and 2023 should the aforementioned catalysts come into play.
Taking the factors above into account, earnings for the consumer sector is expected to grow by 6.43% in 2021, 25.53% (2022) and 7.61% (2023), and to recover to pre-pandemic levels by 2023.
In terms of valuations, the sector is currently trading at a forward PE (price-to-earnings ratio) of 16.58 times based on 2023 earnings which is a slight discount compared to its 10-year historical average of 19X, representing an upside potential of 15%.
At current valuations, the consumer sector presents a decent opportunity for investors who are looking for reopening plays that are still trading at below pre-pandemic levels. – Sept 3, 2021
iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
