India

GDP rebounds strongly

Strong 3Q2017 GDP of 7.2% y/y is the fastest growth since 3Q2016, which brings the average of the three quarters to 6.4% y/y while our fiscal year ending March 2018 projection is 6.7% y/y. Growth is supported by government infrastructure spending while private consumption moderated further for the fourth consecutive quarter owing to tepid income growth in urban and rural areas.

Looking ahead, we expect the GDP to grow 7.0% in FY2018, supported by domestic spending as the disruption from demonetization and GST implementation may be over. And with prices expected to exhibit upwards pressure, there is room for the Reserve Bank of India (RBI) to review its monetary policy during the August meeting.

However, concerns still remain over the ramping up of India’s fiscal deficit and the twin balance sheet problem as the rising non-performing loans in state run bank will pose a great challenge for India to ensure sustainable growth.

• The 3Q2017 GDP rose 7.2% y/y from 6.5% y/y in 2Q2017 which turned out to be the fastest growth since 3Q2016. This brings the average of the three quarters to 6.4% y/y for 2017 while our fiscal year ending March 2018 projection is 6.7% y/y.

• Growth was supported by the strong performance coming from investment which grew 11.9% y/y from 6.9% y/y in 2Q2019. Strong investment came from government infrastructure spending. We believe the investment from this segment could be sustainable unless private investment recovers.

• Meanwhile, private consumption grew moderately by 5.6% y/y from 6.5% y/y in 2Q2017, marking the fourth successive quarter of moderation. Private consumption is being constrained by tepid income growth in both urban and rural areas. Corporate earnings data points to flat wage growth. Induced by higher imports, net exports also proved to be a drag on overall growth

• As for the recovery in gross value added (GVA), it came mainly from stronger industrial activity and higher-than-expected growth in agriculture sector. Manufacturing segment grew 8.1% y/y from 6.9% y/y growth in 2Q2017. Besides, the services sector also rose by 7.7% y/y from 7.1% y/y in the previous quarter, supported by higher spending in public administration.

• Following the strong growth in 3QFY2017, it suggests that the previous disruption in the economy due to India’s demonetization and GST implementation may be over. We expect the economy to gain momentum and project a 7.0% for FY2018 underpinned by domestic activities. And with prices expected to exhibit upwards pressure, there is room for the Reserve Bank of India (RBI) to review its monetary policy during the August meeting.

• However, concerns still remain over the ramping up of India’s fiscal deficit and the twin balance sheet problem as the rising non-performing loans in state run bank will pose a great challenge for India to ensure sustainable growth. The challenge in 2018 will come from the tighter rules to address the stressed assets which may result in higher non-performing assets (NPA). Banks will need to reclassify restructured loans as NPAs. This can slow down the recovery in credit and investment.

Malaysia

Back to positive real returns

January headline inflation grew at the slowest pace in two years, up 2.7% y/y which turned out to be marginally lower than our projection of 2.8% y/y. Meanwhile, core inflation rose at the same pace as in December by 2.2% y/y. Meanwhile, the Producer Price Index (PPI) in January fell by -1.2% y/y, the first negative growth since August 2016 dragged by cost of intermediate materials as well as finished goods.

We project headline inflation to be around 2.8% in 2018 due to: (1) a stronger ringgit which will soften the cost of imports and transfer pricing; (2) firmer commodity prices with oil prices i.e. WTI and Brent to average around US$57 per barrel and US$61 per barrel in 2018; and (3) base effect.

On that note, we expect the economy to be in the positive real return in 2018, after sitting in the negative region in 2017. Although BNM has raised the OPR rate once in early 2018 by 25 basis points to 3.25%, our base case remains as no rate hike for 2018. Nonetheless, we are pricing in a 20% chance for another rate hike in 2H2018, much depending on the speed and magnitude of rate hike by the US Fed.

CPI

• January headline inflation grew at the slowest pace in two years. It rose 2.7% y/y from 3.5% in December 2017, marginally lower than our projection of 2.8% y/y. We found the price of food grew moderately by 3.8% y/y in January from 4.1% y/y in December, while the core inflation rose at the same pace as in December by 2.2% y/y.

• In the month of January, food and alcoholic beverage prices climbed 3.8% y/y from 4.1% y/y in December. Transport prices rose slower by 5.7% y/y in January from 11.5% y/y in December. We found the fuel prices i.e. RON95 and RON97 averaged at RM2.29 and RM2.56 in January, marginally higher than December’s average of RM2.27 and RM2.54 respectively.

• Meanwhile, the Producer Price Index (PPI) in January fell by -1.2% y/y from +0.3% y/y in December 2017. This is the first negative growth since August 2016. The drag came from the cost of intermediate materials which fell from 0.9% y/y in December 2017 to -1.5% y/y in January. Besides, the cost of finished goods also slipped by 0.4% y/y in January from +0.1% y/y in December.

• We project headline inflation to be around 2.8% in 2018 due to: (1) a stronger ringgit which will soften the cost of imports and transfer pricing; (2) firmer commodity prices with oil prices i.e. WTI and Brent to average around US$57 per barrel and US$61 per barrel in 2018; and (3) base effect.

• On that note, we expect the economy to be in the positive real return in 2018, after sitting in the negative region in 2017. Although BNM has raised the OPR rate once in early 2018 by 25 basis points to 3.25%, our base case remains as no rate hike for 2018. Nonetheless, we are pricing in a 20% chance for another rate hike in 2H2018, much depending on the speed and magnitude of rate hike by the US Fed.

Source: AmInvest Research - 1 Mar 2018