● Industrial Production Index (IPI) picked up to a fivemonth high and back into positive growth in July, beating expectation (1.2% YoY; house estimate: 0.7%; consensus: 1.0%; Jun: -0.4%)

- The stronger than expected rebound was mainly due to the full impact of Recovery Movement Control Order (RMCO) and softer growth contraction in mining activities.

- MoM: eased significantly after registering a record high growth in the previous month (1.2%; Jun: 26.3%).

- 3-mma: contraction softened in July (-7.0%; Jun: - 17.9%).

● Manufacturing index growth moderated (2.9%; Jun: 4.7%) on a high base, in tandem with the slowdown in manufacturing sales growth (1.9%; Jun: 4.2%)

- Led by a weakening YoY growth in almost all subsectors. In particular, the downturn is attributable to a slower growth in the production of electrical & electronic products (9.6%; Jun: 13.2%), food, beverages & tobacco (3.6%; Jun: 10.5%), and wood products, furniture, paper products & printing (0.8%; Jun: 7.3%).

- MoM: moderated after a sharp recovery in the preceding month (0.2%; Jun: 37.0%).

● Mining index continued its downtrend for the fifth consecutive month, falling by -3.0% YoY but at a much slower pace than June’s -17.1%

- The mining activity slowdown but improving pace was broad-based, led by a softer decline in natural gas output (- 4.4%; Jun: -13.5%), followed by crude petroleum output (-1.2%; Jun: -21.1%).

- In the near term, we expect the mining industries to emerge from the negative territory on the back of improving oil prices. However, persistent demand concerns due to the resurgence of global COVID-19 cases could disrupt mining activities in 4Q20.

- MoM: fastest expansion in eight months (2.4%; Jun: 2.4%), amid higher average Brent crude oil price (USD43.2/barrel; Jun: USD40.3).

● Electricity index headed further down (-5.1%; Jun: -2.4%) due to a higher base

- On a MoM basis, the index charted its third straight months of gain (4.2%; Jun: 0.2%).

● Ongoing recovery in industrial production is expected to persist in 2020, but we remain cautious of its sustainability on the back of faltering external demand

- While the industrial production may demonstrate positive growth in the coming months, backed by the domesticoriented activities, it is set to face several hurdles through the rest of the year on the back of fragile external demand due to the re-emergence of COVID-19 infections globally.

- As such, the manufacturing IPI is projected to contract by 7.7% in 2020 (2019: 3.6%), in line with the projected decline in GDP (-5.9%; 2019: 4.3%) for this year.

Source: Kenanga Research - 14 Sept 2020