Consumer Sector, Commodity, & Currency

Global soft commodity price has been in a lower trend, at least since last 2012. As of YTD2016, the global soft commodity price is still continue walking down the lower price trend. Nonetheless, there are some commodities that are moving on uptrend direction, such as sugar and coffee.

Basically, a lower soft commodity price environment should be benefit for consumer staple companies. Lower commodity price means lower raw material price thus should have positive impact on gross margin.

How does this dynamics on JCI’s consumer companies?

Meanwhile for consumer retailer companies, we see that the exchange rate is the main factors correlate with gross margin. This is due to most of our stocks samples are import-based retailers.

Source: Bloomberg

Using quarterly data from 2009 — Jun 2016, we try to see the correlation between soft commodity price (using S&P Soft Commodity Index) and companies’ gross margin. From the result we found that ICBP and ROTI are two companies that have higher negative correlation, -0.93 and -0.68 respectively. Note that we use 3 periods moving average on commodity price, so from the result we can inferred that there’s a lagging effect on margin (approximately a quarter). In other words, current commodity price will have impact on next quarter company’s margin.

Movement of Commodity Price (RHS) and Gross Profit Margin (LHS)

Using the same quarterly data, we now try to see the correlation between forex exchange and companies’ gross margin. From the result we found that MAPI and LPPF are two companies that have higher negative correlation, -0.92 and -0.68 respectively. On this data running we also use 3 periods moving average. Negative correlation means if the Rupiah strengthening against USD, the gross margin will be improving and so does the opposite.

Movement of IDR/USD (RHS) and Gross Profit Margin (LHS)

Going forward we see the global soft commodity price will continue its lower price trend thus this will benefit the consumer staple companies, especially ICBP and ROTI.

On the other hand, we see Rupiah currency will have strong ground from foreign investment inflow, Tax Amnesty sentiment, global liquidity theme, and recovery on domestic economy. This stable currency movement will have positive impact for retailer companies, especially MAPI and LPPF.

— -end of post #43