OVERVIEW

• January IPI expands 3.5%. January’s IPI rose 3.5% (Dec: 4.7%), a stark contrast from the 5.3% consensus forecast (Bloomberg) but above the house expectation of 2.8%. On a MoM basis, the IPI fell by 4.6% (Dec: +4.2%).
• Manufacturing sector back in the limelight. By category, the manufacturing sector grew 4.6% (Dec 4.3%) with growth supported by E&E, Petroleum, Chemical, Rubber and Plastic Product and F&B Sector. Mining production, meanwhile, grew by a slower 1.1% (Dec: 5.8%) as crude oil production declined.
• Industrial production sustained but risks abound. With signs of strengthening external demand – based on the latest external trade data – along with the weaker ringgit, we are somewhat upbeat on external demand carrying industrial production. However, continued weakness in the ringgit threatens to bear against production costs even as the mining sector is expected to be biased on the downside.
• Cautious on growth.With IPI somewhat sustained despite weaknesses in the mining index, we expect 1Q17 GDP to be just a touch lower at 4.4% from 4Q16’s 4.5% with the mining sector contraction likewise reflected in the mining sector GDP.

IPI takes a breather. The IPI moderated for the second consecutive month to 3.5% (Dec: 4.7%), sharply below the consensus estimates of 5.3% growth though it was higher than the house forecast of 2.8%. On a MoM basis, IPI fell 4.6%, erasing the 4.2% growth observed in December. The IPI likewise deteriorated on a seasonally-adjusted basis, contracting 1.1% MoM (Dec: +0.4%, revised from 0.9%). The fall was largely attributed to moderation in the mining index, and to a lesser extent, the electricity index.

Robust manufacturing sector. The manufacturing sector, accounting for 65.9% of headline IPI, saw slightly higher growth of 4.6% YoY (Dec: 4.3%). While it contracted 5.2% MoM from seasonal factors, the sector rebounded at a seasonally-adjusted 0.7% MoM (Dec: -0.1%, revised from - 1.2%) after two consecutive months of contraction.

E&E holding up manufacturing growth. Manufacture of electrical and electronic (E&E) sub-sector led manufacturing sector growth, expanding 6.9% in January (Dec: 5.3%). However, it slipped -7.9% MoM (Dec: +3.7%), likely from seasonal factors. Manufacturing growth was further driven by modest expansion in the manufacture of petroleum, chemical, rubber and plastic products and the manufacture of food, beverages and tobacco which grew 2.3% and 6.8% YoY respectively (Dec: 3.7% and

8.8% respectively). Overall, the manufacturing index saw broad-based expansion with all divisions expanding during January including the “transport equipment and other manufactures” division which previously contracted for three consecutive months.

Manufacturing sales continue to pick up pace. In a separate report, manufacturing sales kicked off the year with sales of RM61.2b in January, a 10.7% YoY increase. Manufacturing sales was 0.5% lower on a MoM basis though after seasonally adjustment, sales was marginally higher by 0.3% MoM. We believe that sustained sales levels will help provide some support for manufacturing demand. Furthermore, the latest external trade data continue to suggest firming external demand, notwithstanding narrower trade surplus.

Mining production eases. The mining sector (28.9% of the headline IPI) eased considerably to 1.1%, after peaking at 5.8% during December. While the index continued to be sustained by the natural gas sub-index, the sub-index moderated to 5.3% (Dec: 12.7%). Combined with the 2.3% YoY drop in crude oil production (Dec: +0.1%) overall mining sector growth was moderate, at best. Indeed, on a seasonally adjusted basis, mining production fell 3.2% MoM.

Electricity output moderates further. The electricity sector (5.2% of the headline IPI) grew by just 1.1% YoY (Dec: 6.1%). The electricity index contracted 2.0% MoM and fell 3.2% after seasonal-adjustment.

Global manufacturing PMI continues firming. Global PMI continued show strength in February, at 52.9 (Jan: 52.7). This follows overall optimism in the advanced market economies with US and Euro Area’s respective PMI at 57.7 (Jan: 56.0) and 55.5 (Jan: 55.2) respectively, above the 50.0 threshold. The developed Asian economies continued to be a mixed bag with Japan and Singapore’s headline PMI at 53.3 (Jan: 52.7) and 51.4 (Jan: 51.6) though South Korea’s PMI continues to be weak at 49.2 (Jan: 49.0)

Malaysia’s PMI edging up. Malaysia’s PMI remains below the 50.0 threshold at 49.4 in February (Jan: 48.6) though it was the highest since May 2015. The increase in its output sub-index, its first since March 2015, is encouraging, possibly signalling an eventual reversal in the index by 2Q17 and by extension, industrial production.

OUTLOOK

Manufacturing sector resilience. Despite IPI’s second consecutive month of moderation, we remain somewhat upbeat on the industrial sector outlook given the relative strength of the manufacturing sector. The E&E sector, in particular, helped pick up some slack from the moderation in the mining sector. Further evidence on firming external demand (from January’s external trade numbers) will help sustain expansion in the manufacturing sector though we are cautious on the impact of the weaker ringgit driving up production costs. We are also slightly concerned on moderating growth in the petroleum, chemical, rubber and plastic product manufacturing division though we do see manufacturing sector growth remaining resilient overall.

Mining sector weak, as expected. The mining sub-index may continue to be somewhat subdued throughout 1H17 given Malaysia’s participation in OPEC’s voluntary oil production cut. While the preliminary impact of OPEC’s initiative remain mixed, we are cautiously optimistic on prospects for renewed investments in the petroleum mining sector in the longer term, though at present, we believe that the mining sector will continue to be biased on the downside, at least until the expiry of the production cuts in June 2017 (or December 2017, assuming a possible 6-month extension).

Sustained 1Q17 GDP growth. With IPI somewhat sustained despite weaknesses in the mining index, we expect 1Q17 GDP to be just a touch lower at 4.4% from 4Q16’s 4.5% as the weak mining sector likely be a drag to the overall economic growth over the next three to six months.

Source: Kenanga Research - 14 Mar 2017