Rock  solid.  The world's economy appears stormy  as  the  Eurozone  struggles  with  mounting debts  and  China  is  seeing  softer  domestic  demand  and  slowing  export  growth.  Although  the weaker  global  economic  outlook  for  2013  might  weigh  on  consumer  sentiment  and  corporate earnings, we expect  Malaysia's consumer sector to outperform the market  due to the inelastic demand  for  basic  necessities.  Malaysia's economic prospects  for  2013  seem  bright  with  GDP expected  to  grow  by  4.9%  (MIER  forecast)  on  the  back  of  strong  domestic  consumption, boosted by stellar y-o-y growth in private and public consumption as well as investment outlays. Moving  forward,  we  believe  consumer  spending  will  remain  resilient,  buoyed  by  steadily increasing  household  income  as  well  as  a  low  unemployment  of  3%.  Companies  that  rely  on domestic demand are likely to deliver healthy top- and bottom-line results next year.

Sizeable middle-income group will support retail. Malaysia's stable economic growth since the 1990s has lifted a large number of the population out of poverty, which  in turn fuelled the demand for consumer staples. The recent implementation of the minimum wage policy for the private  sector,  which  complements  the  National  Transformation  Policy  to  drive  Malaysia towards  a  high-income  nation  by  2020,  will  also  help  bolster  household  disposable  income. We  expect  the  generous  cash  handouts  to  low-income  households,  personal  tax  rate reduction, and the special bonuses and incentives for the military forces  and civil servants in the  2013  Budget  to  have  some  spillover  effect  on  the  overall  consumer  sector.  Collectively, these should boost the disposable income of Malaysians, which will in turn spur consumption although it might not be enough to prop up purchases of big-ticket items.

Stable commodity prices buoy F&B sector. As demand for basic necessities is usually stable and  inelastic,  the  performance  of  F&B  companies  depends  largely  on  commodity  prices  and manufacturing costs. Raw material costs soared in 2010, biting into the margins of F&B players. Although prices for food commodities are still high, they have either stabilised or fallen from the peak  on  concerns  that  the  European  debt  crisis  will  crimp  demand.  As  spending  on  F&B comprises  the  largest  component  of  monthly  household  expenditure  in  Malaysia,  we  expect demand for food to remain stable regardless of economic conditions.
 
Maintain  OVERWEIGHT.  We  remain  optimistic  on  the  overall consumer  sector  as  we  believe that consumer spending will remain strong  given the rising monthly household income  backed by low unemployment rate and the implementation of the minimum wage policy.  Consumption had  been  solid  even  during  periods  of  slower  real  GDP  growth  and  weaker  consumer sentiment.  Our  top  pick,  QL  Resources  (BUY,  FV:  RM4.05),  which  is  involved  in  basic  food industry,  still  experienced  resilient  demand  for  its  products  during  economic  downturns.  The company's expansion into ASEAN countries  with  growing  populations  such  as  Indonesia  and Vietnam is opennng up vast market opportunities, which bodes well for its long-term growth.

Source: OSK