● July export growth rebounded to a six-month high of 1.7% YoY (Jun: -3.4%), slightly higher than house estimate of 1.4% but far above consensus call of -4.2%. On a MoM basis, the turnaround was even sharper at 15.5% (Jun: - 9.5%). The stronger YoY performance was mainly driven by improved demand from China and Hong Kong, and larger export value for electrical & electronics (E&E). Similarly, imports deceleration eased to -5.9% (Jun: -9.8%), outpacing consensus and house estimate of -7.4%. As exports grew at a faster pace compared to imports on a MoM basis, the trade surplus widened to a four-month high of RM14.3b (Jun: RM10.5b). Year-to-date, exports contracted by 0.4% (2018: +7.8%), while imports dropped by 2.6% (2018: +5.0%), resulting in an enlarged trade surplus of RM81.6b (2018: RM70.5b).

● Product-wise, improvement in shipments of E&E offset lower shipments of commodities, specifically crude petroleum and palm oil. Exports of E&E rebounded to 4.5% (Jun:-6.0%), propelled by increased demand for electronic integrated circuits, defying the down cycle of the semiconductor industry. This has outweighed the steep contraction in shipments of crude petroleum (-45.7%; Jun: +31.7%), as the growth in the average Brent crude oil price dropped further by 13.9% (Jun: +7.9%) to USD63.9/barrel. In the immediate term, crude petroleum exports will likely remain pressured by the recent unfavourable developments surrounding the US-China trade talks. Similarly, exports of palm oil fell markedly by 14.2% (Jun: +7.9%), reflecting the lower average price of crude palm oil during the month (RM1,879/MT; Jun: RM1,968/MT). Nonetheless, we foresee improved palm oil exports in the near term as China halted imports of agriculture products from the US.

● By destination, the better exports figure was led by rising demand from China, followed by Hong Kong, and Singapore. Exports to China marked a positive turnaround, expanding by 3.8% (Jun: -10.7%) with its contribution to export growth edged up to 0.6 percentage points (ppt) (Jun: -1.5 ppt.), in part lifted by front-loading of US-bound exports amid the temporary-nature of the trade truce achieved post-G20 summit in July. Of note, exports to Singapore returned to an expansion (3.1%; Jun: -1.2%), contributing 0.4 ppt to the overall growth. Meanwhile, weaker exports were recorded to the US (0.7%; Jun: 0.8%) and the EU (-0.3%; Jun: +0.1%).

● Tracking a similar direction, imports declined by less in July, led by the capital goods segment (-12.4%; Jun: - 24.4%), followed by intermediate goods (-2.4%; Jun: -3.0%) and consumption goods (-4.5%; Jun: -5.3%). Notably, the bulk of the higher import growth was attributable to the re-exports category (-4.1%; Jun: -22.3%), while retained imports improved by a smaller margin (-5.7%; Jun: -6.1%), suggesting continued weakness in domestic demand.

● Overall, we retain our view that trade performance would remain subdued, premising upon the prevailing uncertainty surrounding the US-China trade feud, faltering economic growth in major global markets, including China and the EU, as well as the escalating Japan-South Korea trade war, jeopardizing the global supply chain for smartphones and electronic devices. As such, we foresee export growth to meet the lower-end of our forecast range of 1.0%-2.0% in 2019 (2018: 7.3%), as a rebound resulting from trade diversion may be observed in the 2H19. Coupled with soft domestic demand, GDP growth will likely extend its slowdown into the 3Q19 to 4.4% from 4.9% in 2Q19, adding to our whole year projection of a slower growth of 4.5% (2018: 4.7%).

Source: Kenanga Research - 5 Sept 2019