Malaysia’s industrial production (IP) rose to a near 3-year high in February, benefitting from across-the-board increase in manufacturing, electricity and mining. The jump in manufacturing output was supported by the strong manufacturing sales which climbed by 7.0% in February from 2.6% in January. Despite the strong manufacturing output and sales in February, our PMI manufacturing remained in the contraction region for the third consecutive month, reading below the “50” threshold that marks the division between expansion and contraction.

With the manufacturing sector having cut production in March in response to the Covid-19 pandemic, it should potentially be reflected in March’s manufacturing output figure under the IP. More so with the global pandemic reducing demand and restricting operating capacities due to severely delayed deliveries of inputs. Expectations are for our manufacturers to make further cuts in production in the next 12 months on concerns over the duration of the global pandemic and how bad it is going to damage sentiments, prospect of sustained supply chain disruption and drop in new businesses from domestic and external clients.

Therefore 2Q is set to be worse, both in terms of exports and domestic demand. But the downside risk is likely to be contained with the rolling out of the stimulus measures in both the fiscal and monetary aspects. Having said that, until more is known about the probable length of the pandemic, businesses are likely to remain highly risk averse. Companies’ future earnings are expected to slide to an all-time low. Hence, we reiterate 2020 GDP growth of between +0.4% and -2.0%.

• Our industrial production (IP) rose to a near 3-year high in February. It reported a strong growth of 5.8% y/y from 0.6% y/y in January, bringing the first two months’ average to 3.2%. Strong output came from manufacturing which rose 5.6%y/y in February from 2.2% in January. The jump in manufacturing output was supported by the strong manufacturing sales which climbed by 7.0% in February from 2.6% in January.

• Details of the manufacturing output showed improved performance in areas like: (1) E&E, up 5.1% y/y in February from 3.2% y/y in January – the highest since December 2018; (2) food, beverages & tobacco, up +4.5% y/y from -5.5% y/y; and (3) transport equipment & other manufactures, up 4.9% y/y in February from 1.4% y/y in January.

• Despite the strong manufacturing output and sales in February, our PMI manufacturing remained in the contraction region for the third consecutive month, reading below the “50” threshold that marks the division between expansion and contraction. And with the manufacturing sector having cut production in March in response to the Covid-19 pandemic, it should potentially be reflected in March’s manufacturing output figure under the IP. More so with the global pandemic reducing demand and restricting operating capacities due to severely delayed deliveries of inputs.
• Expectations are for our manufacturers to make further cuts in production in the next 12 months. Concerns remain on how long the global pandemic would last and how bad it is going to damage sentiments that is tumbling to its lowest level since January 2016. The negative outlook also depends on the prospect of sustained supply chain disruption. New businesses from domestic and external clients are lower from the negative economic impact due to the pandemic, which intensified in March.

• Therefore 2Q is set to be worse both in terms of exports and domestic demand. But the downside risk is likely to be contained with the rolling out of the stimulus measures in both the fiscal and monetary aspects. Having said that, until more is known about the probable length of the pandemic, businesses are likely to remain highly risk averse. Companies’ future earnings are expected to slide to an all-time low. Hence, we reiterate 2020 GDP growth of between +0.4% and - 2.0%. stricting operating capacities due to severely delayed deliveries of inputs.

Source: AmInvest Research - 14 Apr 2020