Why investors must be cautious on Singapore consumer stocks next year

Net profit growth could slow down.

According to DBS, overall, it advocates a cautious stance and advise investors to be selective on Singapore consumer stocks, given their relatively high valuations compared to historical mean.

Here's more:

Following disappointing 3Q results, we have reduced revenue and net profit growth for consumer companies under our coverage.

We now expect FY13F/14F revenue growth of 4%/7%, from 6%/8% previously. Coupled with expectations of weaker margins, we project a slower net profit growth of 4%/9% (from 18%/14%), for FY13F and FY14F respectively.

We believe broad sector re-rating and outperformance in 2014 are unlikely, given that valuations are at +1SD above historical mean. In this sector, we look to stock specific drivers for our stock picks.

Based on our current expectations, we believe corporate earnings for consumer stocks have entered into a more challenging environment. In 2012, stocks in our Singapore consumer universe registered strong revenue and net profit growth of 12% and 9% respectively, driven by rising income and subdued inflation regionally. Operating margins also expanded, benefitting from favourable input prices.

By contrast, 2013 earnings growth is now likely to slow due to challenges in consumption demand regionally and slight upward pressure in input prices.