Asian consumer firms hit with double-whammy in 2Q

Here's its impact on Singapore firms.

According to OSK, consumer stocks under its coverage were dealt a double blow by spiking earnings misses in 2Q and rising interest rates, which eroded their average YTD gain to -1%.

With valuations near their historical highs and limited relief from weak consumer sentiment amid escalating cost pressures, OSK sees an unexciting risk-reward tradeoff as investors are likely to start factoring in higher yield expectations going forward.

OSK noted that consumer companies in its Indonesia and Thailand offices were the worst hit, with each of them recording an average loss of 24% during the period, followed by Singapore’s -9%, Hong Kong’s -9% and Malaysia’s -4%.

Here's more:

1% loss YTD. Up to May 2013, the 100 regional consumer counters we cover posted an average return of 19%. Since then, however, they have lost their share price gains, falling by an average 1% 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% YTD.

49% missed on earnings. The 2QCY13 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% were above, 40% within and 49% below our analysts’ estimates (1QCY13: 6%, 68% and 26% respectively).

Cost-induced pressure was commonly cited by regional companies as the key reason for falling short on expectations. Of more concern is our observation that consumer confidence in the region has been waning in recent months.

An average 1% spike in yield. Our earlier sensitivity analysis shows that a 0.5ppt increase in 10-year government bond yields may potentially give rise to an average 10% drop in the fair values of stocks, based on discounted-cash flow (DCF).

Following a 0.7ppt spike in US’ 10-year Treasury bond yield since May to 2.8% currently, the corresponding yields from countries in the region have risen by an average of 1.1ppt, with Indonesia seeing the sharpest 2.4ppt spike to 8.4%.

Sector P/E at +0.8SD above historical mean. Despite the recent correction, valuations remain high at a ~16x forward P/E, +0.8SD to the sector’s historical 10-year mean of 14x.

In view of limited relief from weak consumer sentiments and escalating cost pressures, we believe the sector’s near-term risk-reward tradeoff would be unexciting.