Market Outlook 2017: Consumer sector

Rising consumer confidence and purchasing power

Indonesia Consumer Confidence Index has rebounded strongly since late 2015, and stood at 116.8 as of October 2016. The upward pattern of CCI is quite consistent and clear as economic growth in 2016 has been recovered from weakness in 2015 along with controlled inflation, thus, lifting purchasing power of Indonesians. Against this backdrop, consumer companies have found the volume growth rebound in 2016 (after practically zero growth in 2015). We expect that CCI will remain on an elevated level in 2017, pinned by stronger GDP growth and still controlled inflation. Stronger purchasing power in 2017 is a support for consumer products volume growth in 2017. Relatively high consumer confidence and purchasing power also means that consumer companies can pass rising input costs to consumer with ease.

Stable and benign input costs

In 2016, consumer companies also saw decreasing raw material costs as commodities prices were lower and Rupiah gained its strength. We do not expect that soft commodities prices to significantly increase in 2017 as global economic growth would remain muted although some growth spots (such as Indonesia) is expected to still deliver relatively strong GDP growth in 2017. Furthermore, we expect more stability of exchange rate in 2017 that can beneficial for consumer companies that import raw materials (such as wheat for ICBP). Following our bullish stand for JCI in 2017, consumer sector as one of the biggest market caps in JCI will also be supported by flow from index-tracking institutional investors in 2017. In 2Q16 alone, Rp3.7 tn of net foreign flow was recorded in JCI, and we believe that the trend will continue in 2017.

Our top picks

We pick INDF for our big cap consumer stock as several positive sentiments give support to the company. INDF sale of China Minzhong will render more stable earnings going forward to INDF as cash proceeds from the sale could be used to reduce foreign currency debt exposure. CPO price rebound in 3Q16 and our expectation of stabilizing CPO price in 2017 is a boon for INDF’s agribusiness division. Moreover, we believe that the wide market valuation gap between’s INDF (as a holding) and ICBP (subsidiary) could contract in 2017 given more stable earnings and less exposure to foreign currency debt.

We also like AISA for our small cap consumer stock, as we expect for solid topline growth ahead, backed by its increasing distribution network points, new product developments and its branding/marketing strategies. We also view that AISA’s latest divestment of its agribusiness division should assist for a healthier balance sheet and stable earnings going forward. In addition, we also see that AISA’s rice division should remain to be its largest contributor, with overall margin improvement expected from its higher-margin branded pack rice’s rising contribution.