January’s trade surplus of RM11.5bil turned out to be a 3-month high from RM10.4bil in December. The strong trade surplus was supported by a 3.1%y/y growth in exports (+4.8% y/y in December 2018) and 1% y/y gain in imports, the same pace as in December. A key point to note is that despite registering a 3-month high, exports are moderating due to a slower 2019 global GDP outlook plus the electronics cycle has peaked and a softer outlook on commodity prices.

Another key point is on the performance of imports. Both the imports from capital and intermediate fell, which we believe is partly due to weakening business conditions in the manufacturing sector. Looking at the manufacturing Purchasing Managers’ Index (PMI), it worsened at a stronger pace in February than in January to read at 47.6 from 47.9 in December.

Looking at the trade data as well as the manufacturing PMI, it somewhat suggests the overall outlook for the economy in 1Q2019 could turn out to be lower than the 4Q2018 real GDP of 4.7% y/y. We are of the view that the domestic economy would most likely grow around 4.5% for 2019 as a whole from 4.7% in 2018. With that in mind, though we expect Bank Negara to maintain its policy rate at 3.25% in today’s meeting, we are looking at a rate cut in 2H2019.

• January’s trade surplus of RM11.5bil turned out to be a 3-month high from RM10.4bil in December. The strong trade surplus was supported by a 3.1% y/y growth in exports (+4.8% y/y in December 2018) and 1% y/y gain in imports, the same pace as in December.

• A key point to note is that despite registering a 3-month high, exports are moderating due to a slower 2019 global GDP outlook plus the electronics cycle has peaked and a softer outlook on commodity prices. Exports of E&E grew 8.2% y/y from 14.2% y/y in December 2018 while commodity-related exports were depressed with crude petroleum down 1.1%y/y, palm oil and palm oil-based products fell 17.3% y/y and natural rubber shrank 5.6% y/y. Only LNG rose 37.5% y/y from -2.7% y/y in December 2018.

• Another key point is the performance of imports. Both the imports from capital and intermediate fell by 3.3% y/y and 0.8% y/y respectively in January from -21.7%y/y and 3.1% y/y respectively in December. We believe it is partly due to weakening business conditions in the manufacturing sector. Looking at the manufacturing Purchasing Managers’ Index (PMI), it worsened at a stronger pace in February than in January to read at 47.6 from 47.9 in December.

• Looking at the trade data as well as the manufacturing PMI, it somewhat suggests the overall outlook for the economy in 1Q2019 could turn out to be lower than the 4Q2018 real GDP of 4.7% y/y. We are of the view that the domestic economy would most likely grow around 4.5% for 2019 as a whole from 4.7% in 2018.

• With that in mind, though we expect Bank Negara to maintain its policy rate at 3.25% in today’s meeting, we are looking at a rate cut in 2H2019. We believe there is more room for Bank Negara to open its doors wider for a potential rate cut in 2019. Adding on, there is a lack of inflationary pressure plus increasing probability for the US Fed to maintain its policy rate, translating into a potential stronger ringgit vis-à-vis USD.

Source: AmInvest Research - 5 Mar 2019