Every January, analysts try to predict which sectors will perform well for the year. After suffering from a weak 2019, we think there’s a good chance that consumer stocks will be among the best performing stocks in 2020.
There are several reasons for our bullish view on consumer stocks. One of the main reasons is improving consumer confidence largely brought about by the benign inflation environment. Recall that consumer spending disappointed during the first half of 2019 as consumer confidence based on the BSP’s consumer confidence index turned negative starting the second half of 2018 due to the steep rise in average inflation to 5.2 percent during the said year.
However, with average inflation dropping to an average of only 2.5 percent in 2019, consumer confidence began to recover in the second half of 2019, with the BSP’s consumer confidence index returning to positive territory.
Another reason for our positive view on consumer stocks is the Philippines’ more favorable economic growth outlook brought about by the timely passage of the 2020 national budget this January. Recall that the passage of the 2019 national budget was delayed to mid-April last year. To make matters worse, there was an election ban which led to the further delay in the roll out of infrastructure projects.
The delayed passage of the national budget was largely responsible for the Philippines’ weak GDP growth of only 5.6 percent during the first half of last year as government expenditure was flat at P1.6 trillion in the fist six months of 2019. For this year, the government’s expenditure is projected to grow by 12 percent to P4.1 trillion, with the budget of the DPWH and DOTr increasing by 25.2 percent and 45 percent respectively.
The stronger economic growth this year should help create more jobs and boost consumer spending. In fact, as of October last year, both the unemployment and underemployment rates were at their lowest since 2005 at 4.5 percent and 13 percent respectively.
Finally, despite the consumer sector’s improving outlook, valuations of consumer stocks remain very attractive with most listed consumer companies trading significantly below their five-year historical average P/E multiples.
Consumer companies are also the least vulnerable to regulatory risks, which is currently one of the main risks that foreign investors are most worried about.
However, not all consumer companies are expected to perform well in 2020. Earnings of restaurants could remain disappointing as they suffer from more intense competition and higher costs. Note that due to the growing popularity of third-party food aggregators, listed restaurants registered weaker same store sales growth in 2019 as they lost market share to smaller restaurants which were previously at a disadvantage due to their limited store network and no in-house delivery. More intense competition could also lead to higher marketing expenses. Furthermore, restaurants could suffer from higher raw material costs as the African Swine Fever outbreak has not yet been contained and could push meat prices higher. Given listed restaurants’ weak earnings outlook, their stocks would most likely underperform other consumer stocks despite their similarly attractive valuations. INQ