OVERVIEW

• A return to pessimism. The Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) fell to 48.7 in May, below the 50.0 threshold. This occurred despite relatively optimistic key indicators in the real economy and buckled the fourmonth improvements in the PMI.
• Broad deterioration in output, new orders and purchasing activities. Poor demand was linked to the deterioration in these indicators and is among the overarching theme of the pessimistic PMI findings. This reversed the improvements erstwhile observed in April’s output and new orders sub-indices.
• Easing price pressures. Respondents reported cost pressures easing somewhat in May though price levels remain elevated, compared to recent history. This fed into a more subdued growth in output charges.
• Optimism in employment numbers. Despite the generally bleak PMI report, employment figures were slightly more upbeat with some job creation in the manufacturing sector.
• Wait-and-see on manufacturing trajectory. With May’s release, we are slightly more cautious but retain a fair degree of optimism on Malaysian growth trajectory. Our view is grounded in improvements in fundamentals observed with improvement in domestic demand and robust manufacturing sector performance.

Back to the doldrums. Malaysia’s manufacturing PMI sank back into the doldrums with a sub-50 reading of 48.7 points (Mar: 50.7). This was just slightly above the 48.6 reading observed during January but below that of Feb-Apr17. The deterioration was largely attributable to contractions in output, new orders and purchasing activities. However, Markit noted that these contractions were modest overall.

Output and orders falling hand-in-hand. Output declined after four consecutive months of improvements. The fall in output were largely attributed to weaker demand and coincided with the deterioration in the new orders index. Pessimism seeped back into the new orders index after a one-off positive blip in April where the index saw fractional expansion. New export orders, in particular, were singled out as among the factors contributing to lower orders with poorer new orders from Singapore, Thailand and Indonesia mentioned.

Purchasing activities dipped, in line with demand. Purchase of input fell after increasing in April, similar to the prevailing narrative of falling orders. Instead, inventories are being depleted in line with the respondents’ efforts to match stock levels with subdued client demands.

Employment shows an upturn. Markit noted that employment was the main bright spot for the otherwise pessimistic May readings. This was reflected in the positive job creation, its first since January. Backlog of work, meanwhile, were stable with respondents commenting that volume of work-in-hand largely in lock step with new orders.

Cost pressure present but more subdued. Input costs rose by a lower quantum in May, though Markit notes that the respective rates of inflation were strong in the context of historical data. Additionally, respondents cited adverse currency movements resulting in some pressures on import costs. This, likely translated into a modest increase in output charges, albeit at a slower rate as is consistent with the more subdued input cost increases.

Optimistic on the future; pessimism on the present. In contrast to their pessimism of the present, manufacturers were more upbeat on growth prospects, anticipating higher sales, new projects and new product lines to buoy output in the next 12 months though they are cautious on their assessment of the economy and hence, demand and orders.

PMI across the region. The ASEAN PMI index repeated the narrative that manufacturing growth may be losing steam with the headline index falling to 50.5 in May (Apr: 51.1). Among the ASEAN economies, the PMI readings saw Indonesia, Thailand and Vietnam joining Malaysia as countries reporting lower PMI at 50.6, 49.7 and 51.6 respectively (Apr: 51.2, 49.8 and 54.1 respectively) though Philippines saw its PMI improving to 54.3 (Apr: 53.3). Thus far, Thailand and Malaysia are currently the only two ASEAN economies, under Markit coverage, reporting sub-50 reading (Singapore reported a reading of 52.6 in April and their May reading will be released next Monday). The global PMI, meanwhile, slipped to a six-month low in May, falling to 52.6 (Apr: 52.7) though still above the threshold 50.0 and the long run average of 51.4. PMI growth in the US retreated slightly to 52.5 (Apr: 52.8) while in the Eurozone, PMI advanced slightly to 57.0 (Mar: 56.7). Back in Asia, China, like Malaysia, dipped below the 50.0 threshold to 49.6 (Apr: 50.3), which saw slowing growth in output and new orders after 10 months of optimism (barring August 2016 where PMI reading was 50.0).

OUTLOOK

Departure from recent real figures. With May’s figures weighing in, we are slightly more cautious on the trajectory of Malaysia’s manufacturing sector. However, we are more benign on Malaysian manufacturing sector based on fundamentals, as reflected by key economic datasets. We note that Malaysia’s real growth hit its eighth quarter high during 1Q17 notwithstanding the sub-50 reading consistently observed during 1Q17. Instead, we believe that headline growth may have peaked somewhat in 1Q17 though will likely remain elevated relative to mid-2015 to mid-2016. Our upbeat view on the manufacturing sector is also grounded in our more bullish outlook in the external sector, as indicated by strong export growth notwithstanding higher imports. However, we believe that the electrical and electronics demand uptrend has peaked and this may cap further upside to the manufacturing sector.

Divergent with business tendency. It is also worth noting that the 2Q17 business tendency statistics was in positive territories at +4.5% (1Q17: -6.9%) with the industry sub-index at +2.2% (1Q17: -2.7%), indicating improved business sentiments relative to the previous quarter. This may reflect further improvement in domestic demand. We are therefore adopting a wait-and-see approach and await June’s PMI indicator in evaluating if May’s PMI was an aberration to the overall trend.

Cost issues likely to ease further. On the continued recovery of the ringgit, we believe that cost pressures will continue easing, at least in the short term though we expect the adjustments to be gradual on price stickiness. The USDMYR pair averaged 4.314 in May (Apr: 4.407), ending the month at 4.276. This is not unique to the USDMYR pair; the ringgit also appreciated somewhat against the Aussie Dollar, the Indonesian Rupiah, Japanese Yen, Korean Won, and Singaporean Dollar, among others. Furthermore, the Producer Price Index growth trended down for two consecutive months in April at 7.5%, after peaking in February at 10.8%.

Source: Kenanga Research - 2 Jun 2017