This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

WILL the Budget 2018 proposals — from reducing income tax rates by two percentage points for certain tax brackets to a special allowance of RM1,500 for civil servants next year — help lift the consumer sector?

Year to date, the KLCI Consumer Product Index has gained 8.35% to 624.89 points, a tad better than the benchmark index, which gained 6.23% to 1,743.93 points over the same period.

Nevertheless, the proposals announced in Budget 2018 did not seem to change the minds of many research houses, which maintained their neutral call on the consumer products sector.

Most analysts believe the measures will only give a temporary boost. Instead, they are looking at improving consumer sentiment due to better economic prospects to help lift the sector going forward.

“The income tax cut, which increases disposable income by a maximum of RM1,000, will only have a small impact on those within those tax brackets. If you divide that RM1,000 over one year, it is less than RM100 per month,” says Areca Capital CEO Danny Wong.

“As for the special allowance for civil servants, that would probably help ease day-to-day expenditure. However, all these do help improve sentiment.”

For 3Q2017, the Malaysian Institute of Economic Research’s (MIER) Consumer Sentiment Survey saw the index declining slightly to 77.1 points from 80.7 points in the previous quarter.

MIDF Research analyst Nabil Zainoodin believes the Budget 2018 proposals, particularly BR1M and the personal income tax cuts, would have an immediate impact in stimulating consumer spending for the M40 and B40 category.

He says in an email reply that these will benefit mostly the F&B companies, but only in the short term because of the rising prices of materials most companies are facing.

“The ever increasing input costs will put pressure on F&B players to further increase prices. The gross profit margin for companies such as Nestlé (M) Bhd and Fraser & Neave Holdings Bhd for instance, are down quite significantly, with their latest recorded margins in 2Q2017 at 36.6% and 32.3%, from the peak of 42.6% and 36.1%, respectively, recorded last year due to the inability to pass on the rising costs to end consumers,” he explains.

Maybank Investment Bank Research appears more positive on the measures, although it also maintained its neutral stance on the sector.

“We are positive on these measures that essentially will help provide support to consumer demand into 2018 and alleviate some of the cost pressure on households. Companies we think will benefit from these measures would be those that offer mass market consumer goods like Nestle, Bison Consolidated Bhd, 7-Eleven Malaysia Holdings Bhd, Aeon Co (M) Bhd and even Padini Holdings Bhd, Oldtown Bhd and Berjaya Food Bhd,” it says in a report.

Areca Capital’s Wong says economic indicators like the better gross domestic product growth [in the last two quarters], stable commodity prices and contained inflation could help lift the consumer product sector further.

“On a macro level, things are improving. There has been an overhang in corporate earnings for the past few years. There is a lag effect ... maybe we have to wait six months or so for it to catch up,” he says.

Wong, who is slightly positive on the sector, believes that if the ringgit fares better against the US dollar, it would also help the consumer sector. He favours consumer stocks that have been expanding their operations as that would indicate that they are growing.

“If the ringgit hits 4.1 by the end of this year, the import pressure from consumer discretionary goods may be lower,” he says.

An analyst who declines to be named says discretionary spending may pick up, but only marginally, because of improved consumer sentiment. Although there is expectation of a lower unemployment rate and higher wage growth in FY2018, he is concerned that elevated household debt and the high cost of living could continue to weigh on the general affordability of consumers.

However, according to Nabil, the government’s efforts to boost the tourism industry could be a driver to revive the local retailing sector, which has experienced several challenging years.

In Budget 2018, the government declared 2020 Visit Malaysia Year and extended several measures to promote tourism and enhance tourism infrastructure to help revitalise the tourism sector.

A fund manager says tourism-related counters may be worth a second look. Genting Bhd, with its Twentieth Century Fox World theme park plan, and Yong Tai Bhd, with its Impression City plan and theatre in Melaka, could benefit from the influx in internatianal and even local tourists.

Nevertheless, until the spillover effects from the better macroeconomic indicators become visible to consumers, many continue to be cautious on the sector.

“Although things are picking up, they do not remain compelling enough to justify a broad overweight of the consumer sector,” says an analyst.

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