• IPI picks up in July, rising 2.6% yoy; 2.2% mom

• Production supported by higher output in manufacturing and electricity sector

• Manufacturing sales increased to 6-month high

• Productivity rose by 7.5% yoy

• Firmer global semiconductor sales in July

• Global industrial production remains stable despite rising trade tension

• IPI to expand at steady pace amid escalating trade tension

Industrial output growth improves

Malaysia’s industrial production index (IPI) for the month of July increased by 2.6% yoy, after a near 4-year low of 1.1% recorded in the prior month. The stronger IPI growth was primarily driven by manufacturing sector output which accelerated by 5.2% yoy from 4.6% in June, as well as electricity output which rose by 4.5% yoy (+3.0% in June. In addition, mining output fell at a softer 5.9% yoy as compared to - 9.4% in a month earlier.

On monthly basis, the IPI was up by 2.2% in July after declining by 0.5% in the preceding month. The increase in July was due to the increase in all indices: manufacturing (Jul: 1.8%; Jun: 1.5%), mining (Jul: +1.9%; Jun: -5.4%) and electricity (Jul: +6.8%; Jun: -4.3%).

Cumulatively, total IPI grew by 3.2% in the first seven months of 2018 from 4.3% in the same period last year. This was led by slower growth in the manufacturing sector of 5.0%, against 6.3% in the same corresponding period last year. Meanwhile, mining sector declined by 2.0% (7M2017: -0.6%) largely due to contraction in natural gas output. However, electricity index jumped to 3.9% from 1.9% between January and July this year. All in all, IPI suggests that production activities shifting into lower gear.

Source: BIMB Securities Research - 12 Sept 2018

• Distributive trade surged by 10.3% yoy in July

• Sales value continued to exceed RM100bn for third consecutive month

• Retail trade and motor vehicle rose by 13.3% yoy and 12.1% yoy respectively

• Consumers to tighten their purse in the coming quarters

Distributive trade rose by 10.3% yoy to a record an all-time high of RM106.5bn in July. Sales value continued to exceed RM100bn for the third consecutive month. Retail trade hit its highest ever value at RM43.4bn. Similarly, the sales value of motor vehicles reached a record high of RM13.9bn whilst wholesale trade sales value recorded RM49.2bn.

The favourable growth in July was supported by the broad-based segment under distributive trade. Among the three segments, wholesale trade contributed the highest share in the sales value (46.2%) followed by retail trade (40.8%) and motor vehicles (13.0%). Retail trade climbed by 13.3% yoy (Jun: 12.1%; May: 9.3%). Similarly, motor vehicles sales expanded by 12.1% yoy (Jun: 10.1%; May: -2.9%) whilst wholesale trade grew by 7.2% yoy (Jun: 7.4%; May: 7.8%).

On monthly basis, the distributive trade eased further to 0.3% in July from 2.3% in June. Both retail and motor vehicles sales expanded by 1.7% mom and 6.5% mom respectively while wholesale trade dipped by 2.5% mom.

Consumers expected to tighten their purse in the coming quarters

Retail sales climbed by 13.3% yoy to hit the highest ever value at RM43.4bn. It was the strongest growth in retail sales since August last year. Similarly, motor vehicles sales had also expanded by 12.1% yoy to a record high of RM13.9bn. As anticipated, consumers ramped up their expenditures especially on big-ticket items such as motor vehicles after a cautious spending earlier in order to benefit from the 3-month tax holiday period beginning on 1st June. In fact, total industry volume (TIV) for the automotive industry in July remained strong and registered a massive 41.0% yoy and a 6.1% mom (Jun: 28.3% yoy and 50% mom) growth to 68,465 units (Jun: 64,502 units).

Moving forward, we foresee a continuous positive performance in distributive sales buoyed by slowdown in inflation, stable job market and supportive policy changes such as zero-rated GST and stabilized retail fuel prices.

Ground sentiments have improved post-election. The MIER consumer sentiment and business condition indexes have picked up significantly in 1H18, reflecting the feel-good factor on the ground. As Malaysians take advantage of a rare three-month tax holiday where no government tax on goods and services are collected, retail sales are expected to achieve a higher growth in 2018, based on changes in spending patterns during the period when no GST is collected. We also expect improved retail sale growth rate for August before SST's return. But we suspect the positive sentiment could subside at some point amid negative external and domestic factors. As for the final quarter of 2018, we expect growth in retail sales to be slower to reflect higher consumers' spending during the threemonth period with zero-rated GST as major purchases are expected to have been made from June to August of this year. Expect consumers to be more cautious on spending and tighten their purse strings in the coming quarters.

Source: BIMB Securities Research - 12 Sept 2018

• Foreign holdings of MYR debts securities declined to RM187.4bn

• Foreigners sold RM1.1bn of MGS and GII in August

• Total portfolio outflow of RM2.5bn for equities and debt securities combined

• Heightening global trade tensions and financial market volatility could drive further capital outflows

Foreign funds turned net seller of domestic debts with a net loss of RM2.4bn in August, after a brief recovery in July. The outflow of foreign funds was in sync with broad EM trend. This brought the total stock of foreign holdings lower to RM187.4bn in August, equivalent to 13.5%. On a YTD basis, foreign outflows from ringgit bonds expanded to RM19.4bn.

Foreign holdings of MGS in August decreased by RM0.5bn to RM153.9bn (Jul: 154.4bn; Jun: RM150.9bn; May: 158.9bn) whilst foreign ownership of GII declined by RM0.6bn to RM13.2bn (Jul: 13.8bn; Jun: RM14.3bn; May: RM14.8bn). Given the net outflow of RM1.1bn to RM167.1bn in foreign ownership of government debt (MGS + GII), total foreign holding in government debt dipped slightly to 24.7% from 24.8% in July. With foreign share at 24.7% for MGS+GII, foreign positioning is not significant and is comparatively lower from 36.0% in October 2016.

Meanwhile, foreign holdings of discount instruments and PDS declined by RMRM0.7bn and RM0.6bn to RM 7.0bn and RM13.3bn respectively. As a result, in combined amounts (inclusive of short-term bills/notes and corporate bonds/sukuk), foreign holding levels in August 2018 were lower by RM2.4bn, bringing total foreign ownership of MYR bonds to RM187.4bn or 13.5%. As at end-August, there were RM2.4bn outflows (Jul: +RM4.0bn; Jun: -RM6.7bn; May: -RM12.9bn) from total debt securities. The total foreign outflow from equity market in August shrank to just -RM97.4m, compared to -RM1.7bn in July. This marks the fourth consecutive month of gradual decline in foreign selling since May 2018 (Jun: -RM4.9bn; May: -RM5.8bn). This means a total portfolio outflow of RM2.5bn for equities and debt securities combined (Jul: +2.3bn; Jun: -RM11.6bn; May: -RM18.7bn). In the corresponding period, Malaysia’s foreign international reserves fell for the second straight month by a marginal USD0.1bn or 0.1% mom to USD104.4bn (July: USD104.5bn; June: USD104.7bn).

Source: BIMB Securities Research - 12 Sept 2018

• US adds 201,000 jobs in August

• Wages rose 0.4% mom, 2.9% yoy

• Unemployment stays at 18-year low

• Latest economic data keep Fed on track for September rate hike

US non-farm payrolls (NFP) rose 201,00 in August, slightly better than market expectations for 194,000 increase. Employment gains for July and June, meanwhile, were revised down by a combined 50,000 (July: from 157,000 to 147,000; June: from 248,000 to 208,000). The hiring trend over the past six months is still healthy at 192,000 and the economy has produced an average of 207,000 new jobs a month so far this year — faster than the pace of hiring in both 2017 and 2016.

The details across industries showed manufacturing payrolls fell by 3,000 in August, breaking an almost year-long streak of solid gains. Construction added 23,000 jobs. Service providers increased payrolls by 178,000 workers, a three-month high. Gains were led by education and health services at 53,000 jobs, professional and business services with 53,000 and wholesale trade at 22,400. Government payrolls decreased by 3,000. Private employment rose by 204,000, compared with a median estimate of 194,000.

The unemployment rate, meanwhile, was unchanged at 3.9%. The latest figure reflects a decrease of 46,000 unemployed people in August and a 423,000 drop in the number of people with jobs. That lowered the participation rate to 62.7% from 62.9% the prior month. The employment-population ratio, another broad measure of labor market health that central bankers like to watch, fell to 60.3% from 60.5%. Another measure showed diminishing labor-market slack. The underemployment rate (U-6), fell to 7.4%, the lowest since 2001, from 7.5%.

The biggest news in the August employment report was a sharp increase in pay. Average hourly earnings rose 0.4% mom following a 0.3% gain, while the yearly rate of pay increases climbed to 2.9% from 2.7%, marking the highest level since June 2009.

The unemployment rate remained 3.9%, near an 18-year low.

There was a bright spark in the closely watched average hourly earnings measure, which rose 0.4% mom in August. Growth in wages on a year-on-year basis accelerated to 2.9%.

Jobs data show Fed tightening is right course

Political intrigue and anxieties over trade did little to dent a 95-month streak of job creation as employers once again fattened their payrolls, and wages kicked up. The US job market continued to enjoy considerable momentum in August as employment for the month indicated a solid rebound in hiring. Thus, despite indications of the economy operating beyond capacity, and thus a shrinking pool of available workers to draw from, hiring remains surprisingly robust. Though the unemployment rate remained unchanged at 3.9%, it remains significantly below the Fed’s long-run expected range for unemployment of between 4.3% and 4.6%. The drop in the broader measure of unemployment, the socalled U-6 rate, to 7.4% from 7.5% provides some evidence that solid US growth is drawing more individuals back into the labour force.

The strength in labour markets contributed to the wage measure rising significantly to 2.9% yoy in August from 2.7% in July. The upward trend in wage growth has generally tracked the downward trend in the unemployment rate through all of the growth phase of the current business cycle. The pace of increase in wage growth does not as yet jeopardize the Fed’s 2.0% inflation target. However, the risk grows as this measure continues to trend higher and is thus expected to keep the Fed tightening policy. Our forecast assumes that the current fed funds range of 1.75% to 2.00% will rise a further 50bps by the end of this year. The next hike is expected later this month at the September 25-26 policy-setting FOMC meeting. Looking ahead, we will be watching to see if hotter wages in August a onemonth blip or the start of a long-awaited pick up in wage growth that could raise inflation pressures higher than we currently expect.

Source: BIMB Securities Research - 12 Sept 2018

• Inventory surged 12.4% mom to 2.49m tonnes

• CPO production rose 7.9% mom to 1.62m tonnes

• Palm oil exports dropped 8.1% mom to 1.10m tonnes.

• We are maintaining our average CPO price projection of RM2,380/MT for 2018. Maintain Neutral.

August closing stock rose to 2.49m tonnes.

Inventory as at August 2018 surged 12.4% mom to 2.49m tonnes; and maintained its high yoy increase of 28.2%. The higher inventory figure reflects the lower exports and higher palm oil import of 80.19k tonnes compared to 44.03k tonnes in July 2018. Notably, stocks of CPO and PPO (processed palm oil) increased by 3.3% and 23.6% respectively (CPO:+19.8% yoy; PPO:+38.2% yoy) to 1.265m tonnes and 1.224m tonnes during the period. We expect stock level to remain above its psychological level of 2.4m tonnes up to October/November 2018 as demand growth moderates and production is expected to increase.

Export fell 8.1% mom

Palm oil export volume for August declined 8.1% mom to 1.099m tonnes vs. 1.197m tonnes recorded in July 2018 (-26.1% yoy) as EU, Pakistan and China registered lower demand. The EU registered the biggest drop of 49% followed by Pakistan (-27%) and China by 0.03%. Total PO export value dropped 11% mom (-36% yoy) to RM2.72bn.

We are of the view that PO demand for the remaining months is expected to be moderate, which is likely to be affected by 1) ample supply and high stock level of soybean from US, Brazil and Argentina; 2) increased PO supply especially from Indonesia; and 3) weak demand from India due to its high import taxes and weak rupee.

Production increased 7.9% mom.

Malaysia’s CPO production increased 7.9% mom to 1.622m tonnes in August 2018 as sector moves into the seasonally higher production month; but lags behind last year’s production by -10.4%. All states in Malaysia (except Perak and Negeri Sembilan) recorded higher mom production, led by Kelantan which surged by 15.4% mom to 21.8k tonnes, followed by Sarawak (+14.7%), Terengganu (+10.8%), Pahang (+10.6%) and Johor (9.3%). However, on yoy basis, almost all states in Malaysia registered a negative production growth, lagging behind last year’s production number except for Sarawak, which recorded a growth of 3.6% yoy to 406.6k tonnes. Although CPO production for the period Jan-Aug 2018 fell 2.50% yoy to 12.045m tonnes, we expect production would catch-up and start to peak in the month of October /November. Hence, we maintain our forecast that CPO production would reach 20.08m tonnes for this year (+0.9%)

CPO price assumption of RM2,380/MT for 2018 maintained.

The 3-month CPO futures price in the month of August has been range-bound to close the month at RM2,248/MT (lowest in 2nd Aug: RM2,191/MT). On the other hand, CPO price for local delivery, i.e. MPOB’s CPO price for Aug 2018, fell by 1.4% mom (yoy: -17.1%) to an average of RM2,184/MT against RM2,215/MT recorded in the previous month.

For Jan-Aug 2018 period, the MPOB average CPO price stands at RM2,367/MT, down by RM504/MT or -17.5% against RM2,870/MT recorded in the same period last year – and 0.5% below our 2018 average CPO price forecast of RM2,380/MT.

As there is no strong catalyst expected to boost CPO price, we predict that CPO price for the remaining months will trade within a range of RM2,200/MT to RM2,300/MT. Although there were concerns on weak demand of PO, higher supply of soybean and PO, as well as the escalating trade tension between the US and China, we believe the downside for CPO price is limited; as long as crude oil trade above USD70/barrel and SBO price to above USD28 cents/lb, in our view. Hence, we maintain our forecast of CPO to average at RM2,380/MT for 2018 and RM2,450/MT for 2019.

Maintain NEUTRAL

We reiterate our Neutral recommendation on the plantation sector. Maintain Buy calls on SOP (TP: RM3.23) and GENP (TP: RM10.50) while Hold on HAPL (TP: RM2.25), KLK (TP: RM25.50), Batu Kawan (TP: RM19.05), IOIC (TP: RM4.55), TSH (TP: RM1.20), and FGV (TP: RM1.60). We have Sell on IJMP (TP: RM1.70) and Sarawak Plantation (TP: RM1.41) whilst Non-Rated for THP.

Source: BIMB Securities Research - 12 Sept 2018

• The KLCI closed lower last week at 1,799.17, falling by 1.1% versus the prior week on currency contagion, as well as US-China feud.

• The selling pressure on the broader market still clouding foreign and local retail Investors sentiment. Foreign investors were net sellers worth RM663.4m ahead of the long weekend.

• For YTD 2018, local investors continued buying support the market and has reached RM9.4bn. Since May 2018, foreign funds net selling has risen to RM11.9bn.

Outlook still weak

Key highlight for the week is the positive net buy of RM629m by local institutions as opposed to net sell of RM5.8m in week 35. The sell-off in currencies of emerging markets still remained as the largest impact to the stock market. BNM’s decision to maintain its OPR at 3.25% was largely expected. Meanwhile the ringgit was not spared and dipped lower to RM4.14 to the USD. The Malaysian market was also hurt by weakness in telco sector. To-date foreign selling of Malaysian equities is RM9.3bn.

The US markets closed slightly negative after the deadline of public comment on US-China trade feud ends worsen as Trump prepare to carry an additional USD267bn in Chinese goods despite USD200bn threat could materialise very soon.

Week 37 outlook

The performance of the ringgit this week as emerging currencies faced continued selling will likely be the main focus. Several currencies, such as Indonesian rupiah and Indian rupee have hit multiple year lows. The Brazilian real appears to be under renewed pressure this week.

Several Asian stock markets have weakened early this week led by China market. Indeed, Malaysian equities could be affected by negative development in the last couple of days.

Source: BIMB Securities Research - 12 Sept 2018