The surprisingly strong trade surplus of RM20.9 billion was largely supported by two factors namely a favourable base factor and the easing of the movement control order (MCO) which boosts trade. In June, exports grew by 8.8% y/y attributed to the strong E&E, machinery and appliances, rubber-related products and palm oil as well as palm oil-based products.

However, the trade strength looks transitory. Much depends on the sustainability of demand and the growing risk of a second wave of Covid-19 cases that can continue to weigh on exports. Besides, the base effect is poised to become unfavourable. It is likely to cause a sharply negative turn in export growth. The same can be expected for imports while domestic demand continues to take a beating from the virus.

Although trade surplus doubled to RM20.9 billion in June from RM10.4 billion in May, the cumulative surplus in 1H2020 of RM64.6 billion was RM2.7 billion lower from a year ago. It implies a narrowing trend in play for the year.

• June’s trade figures showed our exports rebounded surprisingly strong. It grew by 8.8% y/y, beating the consensus’ 10% y/y contraction and a marked improvement from a 25.5% y/y crash in May. And with imports contracting at a slower pace by 5.6% y/y after shrinking by 30.4% y/y in May, trade surplus in June recorded a whopping RM20.9 billion, the highest since 1984 and compared to May’s RM10.4 billion.
• Looking at the data, there were two factors that supported a strong trade performance. First, it is driven by a more favourable base year effect. And the other is a clawback from the slump during the Covid-19 MCO, which was further relaxed in June.
• Looking at the main export sectors, electrical and electronic exports expanded by 16% y/y and 38% m/m, benefitting from the improvement in global semiconductor sales.
• And the other big sector that supported exports was machinery and appliances which also posted strong gains, at 29% y/y and 56% m/m. Also, rubber-related posted a growth of 101% y/y and 31.9% m/m.
• Higher palm oil and palm oil-based exports, up 45.4% y/y from -15.6% y/y, benefitted from firmer crude palm oil prices that increased by 13.3% m/m to RM2,437 in June. Besides, exports of palm oil to India surged over 300% m/m to 246K tonnes in June from 55K tonnes in May.
• On the downside, the oil-related products (liquefied natural gas and petroleum products) fell 21% y/y impacted by lower crude price even as exports were up 11% m/m.
• Just like exports, the base effect and easing of the MCO assisted the sharp improvement in import performance in June, to -5.6% y/y from -30.4% in the previous month (cons: -13.1%). They were up 19% m/m.
• Details of imports showed capital and consumer goods rising 2.8% y/y and 9.0% y/y in June and 10.4% and 17.4% m/m. Intermediate imports fell 10.8% y/y but climbed 10.7% m/m.
• By destination, shipments to key markets of the US, China and Japan had a strong run on both y/y and m/m basis.
• However, the trade strength looks transitory. Much depends on the sustainability of demand and the growing risk of a second wave of Covid-19 cases that can continue to weigh on exports.
• Besides, the base effect is poised to become unfavourable. It is likely to cause a sharply negative turn in export growth. The same can be expected for imports, as these largely feed into processing for imports, while domestic demand continues to take a beating from the virus.
• Although trade surplus doubled to RM20.9 billion in June from RM10.4 billion in May, the cumulative surplus in 1H2020 of RM64.6 billion was RM2.7 billion lower from a year ago. It implies a narrowing trend in play for the year.

Source: AmInvest Research - 29 Jul 2020