We believe regional consumption growth ahead in China and selected ASEAN (Singapore, Malaysia, Indonesia, Philippines and Thailand) economies will be supported by: 1) forecasted 2014 GDP growths in excess of 5% for four of the six countries, 2) retail sales growth outpacing GDP growth as seen in 1Q14, and 3) consumer optimism for four of the six countries. However, the sector indices are currently trading at forward PERs of more than 1 s.d. above their 2-year historical averages, bringing back memories of the sector run-up in 2H13. Hence, we maintain UNDERWEIGHT on the sector and favour consumer staple over consumer discretionary as the former is less vulnerable to excessive sell downs. We continue to like Thai Beverage PLC [BUY; S$0.74], Sheng Siong Group [BUY; S$0.68] and Petra Foods [BUY; S$4.06] but not BreadTalk Group [SELL; S$1.12].
Robust consumption growth ahead
1Q14 saw reasonably healthy expansion in China and selected ASEAN (Singapore, Malaysia, Indonesia, Philippines and Thailand) economies, countries where our covered counters are primarily exposed to. Based on IMF forecasts, four of the six selected countries will enjoy GDP growth in excess of 5% for 2014. Additionally, retail sales growths were well above 10% for half of the countries considered (namely Indonesia, China and Malaysia), outpacing GDP growths. Finally, 1Q14 consumer confidence levels are in the optimistic range for four of the six countries. We believe the aforementioned factors will lend support to consumption growth ahead.
Forward PER trends reminiscent of 2H13; time to be cautious?
FTSE Consumer Services (FSTCS) and FTSE Consumer Goods (FSTCG) indices’ forward PER levels have been inching upwards since a low in Feb-14 YTD. The bull run has been sustained for about four months now into Jun-14, where both indices are currently trading at forward PERs of more than 1 s.d. above their 2-year historical averages. We think the setup will only result in greater sell downs when earnings fail to deliver. It is also uncannily similar to the run-up in 2H13; back then, FSTCS and FSTCG indices saw similar timeframes of bull runs before sharp corrections. We think it is time to be cautious of the sector.
Maintain UNDERWEIGHT
We maintain UNDERWEIGHT on the sector given its YTD run-up in forward PER levels. While the fundamental regional growth story is largely intact, we think the lofty valuations are hard to justify. Immediate headwinds ahead include: 1) eruptions of political unrest in Thailand, 2) higher labour costs due to revised minimum wages and labour policies, 3) slowdown in major economies which will affect regional consumer confidence. Within the sector we favour consumer staple over consumer discretionary as the former is less vulnerable to excessive sell downs. We continue to like Thai Beverage PLC [BUY; S$0.74], Sheng Siong Group [BUY; S$0.68] and Petra Foods [BUY; S$4.06] but not BreadTalk Group [SELL; S$1.12].
1Q14 saw reasonably healthy expansion in China and selected ASEAN (Singapore, Malaysia, Indonesia, Philippines and Thailand) economies, countries where our covered counters are primarily exposed to. Based on IMF forecasts, four of the six selected countries will enjoy GDP growth in excess of 5% for 2014. Additionally, retail sales growths were well above 10% for half of the countries considered (namely Indonesia, China and Malaysia), outpacing GDP growths. Finally, 1Q14 consumer confidence levels are in the optimistic range for four of the six countries. We believe the aforementioned factors will lend support to consumption growth ahead.
Forward PER trends reminiscent of 2H13; time to be cautious?
FTSE Consumer Services (FSTCS) and FTSE Consumer Goods (FSTCG) indices’ forward PER levels have been inching upwards since a low in Feb-14 YTD. The bull run has been sustained for about four months now into Jun-14, where both indices are currently trading at forward PERs of more than 1 s.d. above their 2-year historical averages. We think the setup will only result in greater sell downs when earnings fail to deliver. It is also uncannily similar to the run-up in 2H13; back then, FSTCS and FSTCG indices saw similar timeframes of bull runs before sharp corrections. We think it is time to be cautious of the sector.
Maintain UNDERWEIGHT
We maintain UNDERWEIGHT on the sector given its YTD run-up in forward PER levels. While the fundamental regional growth story is largely intact, we think the lofty valuations are hard to justify. Immediate headwinds ahead include: 1) eruptions of political unrest in Thailand, 2) higher labour costs due to revised minimum wages and labour policies, 3) slowdown in major economies which will affect regional consumer confidence. Within the sector we favour consumer staple over consumer discretionary as the former is less vulnerable to excessive sell downs. We continue to like Thai Beverage PLC [BUY; S$0.74], Sheng Siong Group [BUY; S$0.68] and Petra Foods [BUY; S$4.06] but not BreadTalk Group [SELL; S$1.12].
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