OVERVIEW

● The Industrial Production Index (IPI) growth picked up to 3.1% YoY in March (Feb: 1.7%), exceeding consensus and house estimate of 2.4%, on the back of higher manufacturing output and less decline in mining output. Similarly, on a MoM basis, the IPI rebounded to a 4-year high of 11.4% from -11.6% in the preceding month. On a seasonally adjusted basis, the IPI grew by 1.2% MoM, reversing February’s contraction of 2.0%. Overall, the IPI growth softened to 2.7% YoY in the 1Q19 (4Q18: 3.2%), echoing our view that the GDP growth will moderate to 4.4% in the 1Q19 (4Q18: 4.7%).

● Manufacturing index growth accelerated to 4.1% YoY (Feb: 3.7%), led by improvements in the exportoriented sub-sectors, in particular petroleum, chemical, rubber and plastic products (3.7%; Feb: 1.6%), and to a lesser extent the domestic-oriented food, beverages & tobacco sub-sector (6.8%; Feb: 6.3%). This was in line with the heightened manufacturing sales (5.7%; Feb: 5.5%) and a much smaller fall in March’s exports (-0.5%; Feb: - 5.3%), propped up by a rebound in shipments to China (11.8%; Feb: -1.6%), reflecting the piled up shipment activities following the Lunar New Year holidays in February. Meanwhile, the electrical and electronics (E&E) sub-sector growth slowed to 2.7% (Feb: 3.1%) for the third consecutive month, mirroring the global electronics downcycle.

● Similarly, the mining index registered a smaller contraction of 0.2% YoY (Feb: -5.0%), on the back of broadbased improvement in the natural gas output (1.4%; Feb: -5.6%), extraction of crude oil & natural gas (-0.2%; Feb: - 5.0%) and crude petroleum output (-2.0%; Feb: -4.3%). The upward flip of the overall mining index came on the back of a steady rise in the average Brent crude oil price (USD66.14/barrel; Feb: USD63.96) following reports on steeper production cuts by Saudi Arabia and shutdown of Venezuela’s oil-exporting terminal amid a major power outage.

● The electricity index eased marginally to 4.8% YoY (Feb: 4.9%). On a MoM basis, it rebounded by 14.0% (Feb: - 10.6%), mainly due to the low base effect in February, amid shorter working days and factory closures during the Lunar New Year holidays.

● Though the soft patch in the 1Q19 may have gradually started to recede, as indicated by the increase in April’s manufacturing PMI (49.4, Mar: 47.2), albeit remaining in contractionary mode, we retain our view that the manufacturing performance would remain subdued going forward. This is premised upon the elevated uncertainty surrounding the final outcome of the US-China trade negotiation as Trump hiked tariffs on USD200b of Chinese goods to 25% from the previous level of 10% and initiated the process of enacting tariffs on the remaining USD300b of Chinese imports, with China pledging to impose retaliatory measures. Economic moderation in major global markets, including China, the EU and the US also partly contributed to our outlook. Along with an expectation of soft domestic demand, GDP growth will likely extend its slowdown into the 2Q19 to 4.2% from an estimated 4.4% in 1Q19, adding to our whole year projection of a slower growth of 4.5% (2018: 4.7%).

Source: Kenanga Research - 13 May 2019