OVERVIEW

● Malaysia’s Purchasing Managers Index (PMI) continues its upward trend in July on the back of higher output requirement and export orders. July’s PMI expanded marginally to a five-month high at 49.7 (June: 49.5) due to expansion in output. In addition, new export orders expanded marginally for the first time in six months as evidenced by stronger demand from key international markets. According to IHS Markit, the latest reading signalled a broad stabilisation in manufacturing conditions across Malaysia.

● However, the new orders declined for the sixth consecutive month in July at a modest rate associated with subdued demand.

● Weak Ringgit in July led to higher import costs and pressure input prices faced by the manufacturer. The USDMYR was traded between RM4.02 to RM4.08 in July, though still the best performance currency in the region. However, we expect the reintroduction of fuel subsidy and zero-rated GST would absorb the higher import cost impact resulting in lower headline inflation for the coming months before sales and services tax (SST) takes into effect in September.

● According to IHS Markit, firms raised hiring at a modest pace in response to expansion in output requirements. Employment has risen eight times in the past nine months. Similarly, level of positive sentiment strengthened from June’s eight-month low due to expected improvements in client demand and new projects ahead. However, firms expressed their concerns on the uncertainty and impact of new SST.

● Regional manufacturing conditions continue to remained above the 50-threshold in July but eased as trade war escalates. The Nikkei ASEAN PMI fell to 50.4 in July (June: 51.0) with many major markets recorded a decline in manufacturing activity. Manufacturing PMI in Philippines, Thailand and Vietnam down to 50.9, 50.1 and 54.9 respectively during the month compared to 52.9, 50.2, and 55.7 respectively in June. Meanwhile, China’s PMI fell to 50.8 in July, a record 8-month low as the worsening trade dispute, bad weather and weaker domestic demand weighed on manufacturing activity.

● Trade war erupted with Trump's tariffs on USD34.0b worth of Chinese goods kicked off on 6th July with 25.0% duties imposed on various industrial parts, while China retaliates with tariffs on its imports from the US worth USD34.0b. We believe the trade war would have a significant impact on our manufacturing particularly in electric and electrical (E&E) sector as well as machinery products due to the global supply chain exposure. The new government policy measures in returning fuel subsidy and zero-rated goods and services tax (GST) could bolster growth of the manufacturing sector in the coming months. We expect GDP growth to moderate in the 2H18, bringing our full year growth forecast down to 5.1% compared to 5.9% in 2017.

Source: Kenanga Research - 2 Aug 2018