Asian Consumers

DMG & Partners Research, Sept 3

CONSUMER stocks under our coverage were dealt a double-blow by spiking earnings misses and rising interest rates, which eroded their average YTD gain to -1 per cent. With valuations near their historical highs and limited relief from weak consumer sentiment amid escalating cost pressures, we see an unexciting risk-reward trade-off as investors are likely to start factoring in higher yield expectations going forward.

Up to May 2013, the 100 regional consumer counters we cover posted an average return of 19 per cent. Since then, however, they have lost their share price gains, falling by an average one per cent YTD as more companies missed earnings estimates and interest rates rose. The twin-blow reduced their lead over the relevant MSCI consumer staple and discretionary indices, which posted an average loss of 4 per cent YTD.

The Q2 2013 earnings saw the highest level of earnings disappointments in percentage terms since we started tracking the statistics a year ago. Out of the 62 companies that reported their results, 11 per cent were above, 40 per cent within and 49 per cent below our analysts' estimates (Q1 2013: 6 per cent, 68 per cent and 26 per cent, respectively). Cost-induced pressure was commonly cited by regional companies as the key reason for falling short of expectations. Of more concern is our observation that consumer confidence in the region has been waning in recent months.

Our earlier sensitivity analysis shows that a 0.5 percentage point increase in 10-year government bond yields may potentially give rise to an average 10 per cent drop in the fair values of stocks, based on discounted cash flow. Following a 0.7 percentage point spike in US 10-year Treasury bond yield since May to 2.8 per cent currently, the corresponding yields from countries in the region have risen by an average of 1.1 percentage point, with Indonesia seeing the sharpest 2.4 percentage point spike to 8.4 per cent.

Despite the recent correction, valuations remain high at about 16 times forward PE, +0.8 standard deviation to the sector's historical 10-year mean of 14 times. In view of limited relief from weak consumer sentiments and escalating cost pressures, we believe the sector's near-term risk-reward trade-off would be unexciting.

(Singapore stocks under coverage: Eu Yan Sang, "buy", target S$0.92; OSIM International, "buy", target S$2.38; Sheng Siong Group, "buy", target S$0.78.)