Local spending possible source of stabilization in 2015

Amid market's pessimistic view.

It has been noted that local spending was dragged down by the negative wealth effects and a reduction in fiscal stimulus last year.

According to a research note from UBS, these factors have nevertheless turned more constructive in
2015.

The one-off fiscal benefits for the households are up by HK14bn in 2015, as opposed to a reduction of HKD10bn last year. The increase is equivalent to around 2.5-3.0% of retail sales value.

UBS noted that assume half of this is spent in local shops, sales value could be boosted by 1.2-1.5 percentage points.

Besides, as property prices reaccelerated since late 2014, positive wealth effects could also temporarily boost sentiment and thus local spending.

Here's more from UBS:

Market very pessimistic on 2015 - Hong Kong finally tightened policy on Chinese tourists in response to mounting domestic concerns on capacity constraints. Effective mid-April 2015, the multiple permits, which granted Shenzhen residents an unlimited number of visits to HK since mid-09, are replaced by the 'once-a-week' permit.

The market viewed the move very negatively. This, plus the worse-than-expected sales decline in 1Q15, drove market expectations for an average 4-6%y/y contractions in retail sales this year. A decline of such magnitude, happened last in 2003 on the SARS outbreak, is rather significant.

While we believe the retail sector could remain in a doldrums for a while, a plunge in sales this year can probably be avoided. The tightening in entry permission is in our view modest. More importantly, local spending could pick up the slack this year.

The good news is that, even if we base our forecasts on rather pessimistic assumptions, we are unlikely to see the big slide in sales as most feared. One key consideration missing in consensus forecast is, in our view, a potential cyclical rebound in local spending.

The market focuses predominately on visitor, but it is important not to lose sight of the fact that local spending still constitutes the bulk of retail sales at over 60% of the total. Local spending was dragged down by a reduction in fiscal stimulus and negative wealth effects last year. These factors should turn constructive in 2015.

Fiscal stimulus for the households is up this year. The one-off fiscal benefits for the households are up by HK14bn, compared to a reduction of HKD10bn last year. The increase represents almost 3% of retail sales value. Assume half of this is spent in local shops, retail sales could be boosted by 1.0-1.5 percentage points.

Local spending could also be temporarily supported by positive wealth effects as property prices reaccelerated since late 2014. The feel food factor has also been compounded recently by the stock market euphoria.

The labour market is holding up better than we anticipated despite sluggish growth. This, plus the hike to statutory minimum wage in May (the last hike in May 2013), should support household incomes. Only 5.8% of labour force is below the new statutory minimum wage, but the increase could still spill over onto other low-wage workers as the last two episodes of hike demonstrated.