OVERVIEW

● Malaysia’s Manufacturing Purchasing Managers Index (PMI) continues its expansion for two consecutive months. September’s PMI rose to 51.5 from August’s 51.2, its strongest since November last year driven by stronger rise in employment. Firms hiring rose for the fourth consecutive month in preparation for expected workloads in the coming months. According to IHS Markit, the rate of job creation in the manufacturing sector was the strongest since they started the survey back in July 2012.

● The month’s PMI survey showed a solid rise in output and new business while the volume of backlogs of work fell. New export orders increased albeit at a slower pace as the trade friction between US and China escalated. Meanwhile, level of sentiment weakened in September due to concerns among firms over the implementation of Sales & Service Tax (SST) that could weakened domestic demand.

● The rate of inflation jumped to a 6-month high in September following the reintroduction of SST rate of between 5% to 10%. Consequently, manufacturers raised their prices for the third consecutive month. Meanwhile, the ringgit weakened in September against the dollar as USDMYR was traded between RM4.12 to RM4.15, compared to RM4.07 to RM4.11 in August as the US Fed continues to raise interest rate. Weak Ringgit would raise the cost of imported input, forcing prices to rise. We expect the inflationary impact of a rising cost-push inflation would partly be mitigated by the relatively low and stable fuel prices (RON95) courtesy of the return of fuel subsidy.

● Mix regional manufacturing conditions. Manufacturing PMI in Thailand, Philippines, and the USA increased to 50.0, 52.0 and 55.6 respectively in September from 49.9, 51.9 and 54.7 respectively in August. Meanwhile, China’s PMI slowed to 50.0 in September from August’s 50.6, a record 15-months low as the worsening trade dispute weighed on manufacturing activity. China’s new export orders shrank for the fourth straight month.

● The latest PMI survey signals a possible growth improvement in 3Q18 in spite of escalating trade war and the adverse impact of SST. We believe this is partly to do with China’s move to reduce import tariffs on a range of consumer items to fulfil pledges to further open its consumer market. Average import tariffs will be reduced to 7.5% in 2018 from 9.8% in 2017 as part of its effort to promote balanced development of foreign trade with smaller trading partners. We see a significant opportunity for Malaysia’s export as China is the largest trading partner. In fact, we expect export growth to China to sustain an expansion of more than 30% YoY in the succeeding months following July’s surge of 37.7%.

● We remain cautious with the latest development in the global economy as emerging market now faces the double whammy of a weak currency and high oil prices (Brent crude reached USD83/b), although the latter would benefit Malaysia. Hence, we maintain our view that GDP growth to moderate in the 2H18 to 4.7% from 4.9% in the 1H18, resulting our whole year 2018 growth forecast to slow to 4.8% from 5.9% in 2017.

Source: Kenanga Research - 2 Oct 2018