Economic Outlook 2017 Maintain Cautious

Transcription

1 Dr. Mohd Afzanizam Abdul Rashid Chief Economist Economic Outlook 2017 Maintain Cautious 1.0 Economic review in 2016 Advanced economies the surprise element The global economy remains in the state of limbo during The normalisation of US interest rates, economic slowdown in China and the uncertainty of crude oil prices are some of the common denominators. To a large degree, the rise of populism also had important implication to policy making in the advanced countries in view of the unexpected victory of Mr. Donald Trump on November 8. The resultant effect was none other than volatility in the foreign exchange rates and the global capital is shifting in favour of the developed markets in search for higher returns. The US equity markets barometer, Dow Jones Industrial Average (DJIA) is currently hovering close to an all-time high of 20,000 points with investors are willing to pay 18.2 times forward earnings based on Price-to-Earnings Ratio (PER). Such PER valuation is on the high side considering the plus one standard deviation PER is about 16.5 times. In that sense, equity investors have been sanguine on the earnings potential of corporate America. By the same token, the 10-year US Treasury bonds yielded as high as 2.60% during December as the Federal Reserve is envisaged to deliver multiple rate hikes in This would mean US dollar assets are expected to give higher returns going forward as the central bank would continue normalising their policy rates. Consequently, most Asian currencies depreciated against the US dollar with Japanese Yen (JPY) and Malaysian Ringgit (MYR) was the main casualties, falling by 11.4% and 6.5% respectively. Chart 1: Asian currencies against the US Dollar since November 8 INR PHP CNY THB IDR SGD KRW MYR JPY -11.4% -6.5% -5.9% -4.4% -1.7% -2.1% -2.4% -2.7% -2.7% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% Source: Bloomberg For Internal Circulation Page 1

2 The US economy is undoubtedly on better footing in The 3Q2016 GDP grew by 3.5% q-o-q seasonally adjusted annualized rates (SAAR) from 1.4% in the preceding quarter. This was led by turnaround in private investment to 3.0% after remaining in contraction for three consecutive quarters previously. Additionally, improvement in the labour market as sustained increases in consumer spending also resulted private consumption to grow especially spending on durable goods. Inflation rate appears to be rising albeit gradually to 1.7% in November and likely to move closer to the 2.0% target should oil prices continue to increase next year. The Federal Open Market Committee (FOMC) on December 14 announced the Fed Fund Rate (FFR) will be raised between 0.50% and 0.75% from 0.25% and 0.50% previously. The US monetary policy is poised for further normalisation next year in view of the expected pickup in inflation rate. Chart 2: Federal Fund Rate (FFR) Dec-89 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 Dec-16 Source: Bloomberg Meanwhile, the UK is set to commence its formal discussion on its separation with the European Union (EU) by end of March However, it may not be a smooth sailing. The Supreme Court is expected to announce their decision on appeal to seek parliamentary approval by January 2017 before triggering the Article 50. Again, this can easily create uncertainty given that it can slowdown the Brexit process. This is especially true when lawyers from Scotland, Wales and Northern Ireland have all made their appeal to the Supreme Court in case of Brexit. Bear in minds that Scotland and Northern Ireland voted to stay in EU. As such, it may complicate the exit process should the Supreme Court decides in favour of the appeal. Even so, the uncertainty also hinges upon whether is it going to be a Hard or Soft Brexit. The Hard Brexit would mean a total separation with the EU and therefore, the economic relationship would be based on World Trade Organisation (WTO) rules. On the contrary, the UK would retain some of the privileges with the EU under the Soft Brexit. Regional economies mixed performance GDP growth in Asia was mixed in 2016 but generally tilted on the downside. However, swift intervention by the monetary authority coupled with higher spending by the government stabilised economic growth during the year. For instance, India registered the 3Q2016 GDP growth at 7.3% y-o-y (2016: 7.1%) largely on the back of higher spending by the government which grew by 15.2% (2016: 18.8%). For Internal Circulation Page 2

3 The Reserve Bank of India (RBI) reduced the Repo rate by 50 basis points during the year to 6.25% as inflation rate continued to decline to 3.6% y-o-y in November from 4.2%. In the meantime, China s GDP growth sustained at 6.7% in the 3Q2016 as the country continues to remove the excess capacity and shifting into consumption driven economy. However, the increase in NPL ratio to 1.76% in the 3Q2016 (2016: 1.75%) as well as rising number of defaulted bonds raises questions on the credit quality of the economy. Despite that, Philippines appear to be the star performer with GDP grew by an average of 7.0% for 9M2016 compared 5.7% previously. Key drivers for growth were due to higher fixed capital investment growth of 25.4% (9M2015: 11.8%) and the expansion of consumer spending to 7.2% in 9M2016 (9M2015: 6.2%). Such strong growth has led inflation rate to rise to 2.5% in November after remaining at 2.3% for two consecutive months. Consequently, the central bank, Bangko Sentral ng Pilipinas (BSP) is of the view that the inflation risks are biased on the upside, suggesting that it may raise the policy rates next year. Currently, the BSP s Overnight Reverse Repurchase (RRP) rate stands at 3.0% after 25 basis points cut in July this year. Table 1: GDP growth y-o-y% 3Q Q Q M2015 9M2016 China India Thailand Philippines South Korea Singapore Indonesia Malaysia US UK Eurozone Japan Germany France Italy Source: Bloomberg Table 2: Central Bank policy rates (%) Dec-14 Dec-15 Sep-16 Oct-16 Nov-16 Dec-16 Y-o-Y China India Indonesia Thailand South Korea Philippines Australia New Zealand Malaysia Source: Bloomberg For Internal Circulation Page 3

4 Malaysia weak sentiments to dominate Consumer sentiment was lethargic for the most part of This is premised on the Consumer Sentiment Index (CSI) which continues to hover below the 100 point threshold for nine consecutive quarters. The CSI came in at 73.6 points in the 3Q2016 from 78.5 points in the previous quarter. The rise in general prices as well as weakness in the labour market is the main reason for such pessimism. The average unemployment rate between January and October stands at 3.46% from 3.18% in Meanwhile, inflation rate crept up to 1.8% y-o-y in November from 1.4% previously on account of higher food prices. Despite that, consumer spending appears to be normalising with private consumption grew by 6.4% in the 3Q2016 after a sharp fall of 4.1% in the 3Q2015 (2015: 6.4%) when Goods and Service Tax (GST) introduced during the While consumption among households may seem improving, the current growth trajectory is still fall short from its trend growth of 6.9%. Chart 3: Consumer Sentiment Index (CSI) Q 08 3Q 09 3Q 10 3Q 11 3Q 12 3Q 13 3Q 14 3Q 15 3Q 16 Chart 4: Consumer Price Index (CPI) y-o-y% 4.5% 4.0% 4.2% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 1.1% 1.8% 0.0% Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 For Internal Circulation Page 4

5 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Economic Research, Strategic Management In this regard, the surprised cut in the Overnight Policy Rate (OPR) by 25 basis points was announced by the BNM in July. We believe the move is to support the economy amidst ailing sentiments which could be detrimental to growth if left unattended. Nonetheless, the policy space is increasingly become limited by the erratic movement in the exchange rate as capital outflows were prevalent during the The MYR/USD is hovering at RM4.48 and currently the worst performing currencies among the ASEAN countries. Concerns on the capital control appears to be the main the factor for this and the existence of the Non Deliverable Forward (NDF) markets outside the country have made it worst as it become the reference rate for the Spot market. Foreign funds outflow totaled at RM19.8 billion in the fixed income markets and similarly, RM3.9 billion outflows in the equity markets happened during the month of November. Chart 5: Foreign funds inflow and outflow in debt securities (RM million) 20,000 15,000 10,000 5,000 - (5,000) (10,000) (15,000) (20,000) (25,000) (14,617) (8,937) (19,893) Chart 6: Foreign funds inflow and outflow in equities (RM million) 8,000 6,000 4,000 2,000 - (2,000) (4,000) (3,651) (4,069) (4,281) (3,946) (6,000) Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 For Internal Circulation Page 5

6 Table 3: Gross domestic product (GDP) Y-o-Y% 3Q Q Q 16 9M M 2016 GDP 4.7% 4.5% 4.2% 4.0% 4.3% 5.1% 4.2% By expenditure: Domestic Demand 4.1% 4.0% 3.6% 6.3% 4.7% 5.6% 4.9% Consumption 4.0% 4.5% 5.1% 6.4% 5.8% 6.2% 5.7% -Private 4.1% 4.9% 5.3% 6.3% 6.4% 6.5% 6.0% -Public 3.6% 3.3% 3.8% 6.5% 3.1% 4.9% 4.5% Investment 4.2% 2.7% 0.1% 6.1% 2.0% 4.2% 2.7% -Private 5.5% 4.9% 2.2% 5.6% 4.7% 7.0% 4.2% -Public 1.8% 0.4% -4.5% 7.5% -3.8% -1.9% -0.3% Exports 3.2% 4.0% -0.5% 1.0% -1.3% -0.5% -0.3% Imports 3.1% 4.0% 1.3% 2.0% -2.3% 0.3% 0.3% Net Export 3.4% 4.3% -12.4% -7.0% 5.9% -5.9% -4.5% By industry: Agriculture 2.3% 1.5% -3.8% -7.9% -5.9% 0.9% -5.9% Mining 5.1% -1.3% 0.3% 2.6% 3.6% 6.9% 2.1% Manufacturing 4.9% 5.0% 4.5% 4.1% 4.2% 4.9% 4.3% Construction 9.9% 7.4% 7.9% 8.8% 7.9% 8.4% 8.2% Services 4.4% 5.0% 5.1% 5.7% 6.1% 5.2% 5.6% 2.0 Economic outlook 2017 At the current juncture, there are multiple factors at play and all seems to point a pessimistic or rather a cautious view on what may unfold in The rise of populism in the advanced countries especially in the US have instilled some form of optimism on the developed markets particularly on their growth prospects. This is premised on the ongoing interest rate normalisation by the Fed and the possible fiscal support via infrastructure projects in the US. In that sense, the US markets seems to have promise a better risks and returns matrices relative to emerging markets. However, all this hinges upon the actualization of the election promises by the President-elect. In particular, the run up in equity prices in US have been quite substantial and the valuation seems to have stretch out with PER currently stands at 18.2 times as markets become more sanguine about the US markets. At best, we think the market will reassess once the President-elect takes office on January 20 and how he would implement the next course of action will dictate the market direction. So if there is disappointment in the policy direction, chances are, the market might see some correction. We see investment thesis in Malaysia will likely become more selective and perhaps, the theme would revolve around industries or companies that will benefit from the weak ringgit. Naturally, export-oriented industries will be the key beneficiaries given that their revenue streams are in US dollar. And some of the players have beefed up their production capacity, allowing them to cater for higher demand going forward like in the case of rubber gloves. In addition, we also see lively activities in the tourism sector with tourists arrivals for the 8M2016 stands at 17.6 million, representing an increase of 3.8% from the same period last year. Bulk of the tourists came from Asia such as Singapore (+2.1%, 8.7 million), Indonesia (+9.8%, 1.9 million), China (+26.3%, 1.4 million) and Thailand (+34.8%, 1.2 million). Therefore, this will create demand for Aviation, Accommodation, Food & Beverage and perhaps Healthcare as the players are also hoping to increase their revenue from medical tourism. The Oil & Gas sector could also see some respite after a deal to reduce oil production in the 1H2017 was materealised in December. For Internal Circulation Page 6

7 But bear in mind that the excess capacity is still prevalent in the sector and perhaps, a longer investment horizon is needed when considering investment in the sector. However, business cost is expected to increase especially for the imported goods and debts which are denominated in foreign currencies. So it s always two side of the coins when discussing the effects of currency movements. Despite that, we hope the government would reconsider their fiscal consolidation strategy. We have seen consumer sentiment remain weak based on the Consumer Sentiment Index (CSI) whereby it continue to hover below 100 points level for nine quarters in a row. Empirically speaking, the fiscal position can range between a deficits of 4.8% of GDP and a surplus of 3.2% of GDP provided that investment ratio is more than 23% of GDP in order to have positive effects on growth. We believe that we are in this category and therefore, the government can afford to slowdown its quest to achieve a balanced budget by 2020 as GDP growth is expected to be below potential in the immediate terms. Having said that, the Malaysian economy is poised to record stable growth of 4.4% in This is premised on support from development spending, implementation of key infrastructure, the expected increase in CPO production as well as normalisation of consumer spending. Notwithstanding, the economy is deemed to be growing below its potential growth which is estimated to be around 5%. Therefore, the economy has not fully utilised its available resources given the excess capacity experienced by some industries. In this regard, it is expected that the BNM would pay a close scrutiny as to prescribe proper and timely policy response. Our base case, the Overnight Policy Rate (OPR) would be retained at 3.00%. However, this is contingent upon the evolving outlook on economic growth as we believe the scope for additional rate cut is widely open given inflation rate is likely to remain stable at 2.00%. The currency market is anticipated to be more volatile next year. In the immediate terms, the currency will hover around RM4.40 to RM4.50. The market will certainly reassess the President-elect, Donald Trump economic policies after January 20. As such, we are penciling in MYR/USD to be around RM4.10 to RM4.20 in Perhaps, the anticipation of the 14 th General Election in 2017 could provide some excitement to the equities market which could draw interests from the foreign funds. This also comes when PER valuation has come down albeit marginally to 16.3 times from 16.9 times in September. Therefore, MYR/USD could be well supported. Table 4: Bank Islam macroeconomic forecast Macro variables E 2017F GDP CPI OPR MYR/USD Mean: 3.91 Mean: CPO (RM per MT) Mean:2,166 Mean:2,600 Mean: 2,700 Brent (USD per barrel) Mean: 54 Mean: 45 Mean: 50 Source: Strategic Management, Bank Islam For Internal Circulation Page 7

8 Chart 7: FBM KLCI Price-to-Earnings Ratio (PER) x Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Source: Bloomberg 3.0 Sectoral Outlook Construction Positive The value of construction work done increased by 10.7% y-o-y to register RM31.9 billion in the 3Q2016 compared to 11.7% in the preceding quarter. Residential construction is taking the lead with growth recorded at 16.7% in the 3Q2016 from 12.5% previously. Nonetheless, civil engineering is also recording higher growth at 19.3% albeit slower compared to previous period of 21.6%. Meanwhile, construction of non residential properties declined by 1.4% in the 3Q2016 in tandem with slower launches. The positive view is based on the implementation of infrastructure projects as the number of contracts awarded on key projects such as MRT2 and Pan Borneo Highway would result in higher civil engineering activities. However, we do take note that cost of doing business has become elevated due to the increase in levy of foreign labour and rising building material prices which can have significant implication to profitability. Chart 8: Construction work done y-o-y% 30.0% 26.7% 25.0% 20.0% Chart 9: Average Building Material Cost Index (without steel) % 10.0% 5.0% 0.0% 10.7% 9.7% 15.1% 8.2% 14.0% 11.1% 11.7% 10.7% 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 Sources: CEIC & Bank Islam For Internal Circulation Page Oct-13 Oct-14 Oct-15 Oct-16

9 Economic Research, Strategic Management Healthcare Positive Demand for healthcare services are expected to increase owing to demographic shift such as rising number of population aged 65 years and above, increase in life expectancy and lifestyle diseases. The latest Private Health Index, which is the sub component of Index of Services (IOS), showed rising trend to 141 points as of 3Q2016, recording 5.4% growth over the same period last year. In addition, the increasing adoptions of medical insurance policy and employer tie-up with private hospital operators are also expected to encourage the usage of private medical services. Meanwhile, the weakening of MYR against other currencies indicates that the medical tourism are expected to receive additional demand from abroad. Currently, medical tourism constitutes about 5% of total revenue for the main players and it is expected to go higher in view of competitive exchange rates. As such, the ongoing capacity expansion should bodes well in order to cater for higher demand. Chart 10: Age structure (%) population aged 65 years and over Source: Department of Statistics (DOS) Manufacturing: Rubber gloves positive Total exports of rubber gloves for the 9M2016 stands at RM9.8 billion, higher from RM9.6 billion in the same period last year. This represents 2.0% growth and it is stark contrast to 22.4% growth recorded in In terms of production, the 9M2016 showed 5.4% growth compared to 4.0% in the same corresponding period last year. New production line as a result of past years capacity expansion is now fully operational, leading to supply glut in the industry. Margins could be affected in the interim in view of competitive pricing as well as rising input cost higher minimum wage and gas prices. Nonetheless, the positive view ascribed to the sector hinges upon its close relationship with the healthcare sector and weak MYR in Apart from that, the automation process helped to improve efficiencies, leading to cost savings in the long term. For Internal Circulation Page 9

10 Chart 11: Rubber gloves production y-o-y% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Oil & Gas Neutral The industry continues to face challenges arising from the supply gut. At least now, the industry players have become more committed to cut its production in order to stabilised the oil prices. The OPEC and Non OPEC members have agreed to reduce the oil production in aggregate by 1.8 million barrels per day in the 1H2017 with an option to extend such agreement another 6 months. Currently, Brent Crude is trading around USD56.98 per barrel, the highest in 52 weeks. However, the rise in the number of oil rigs in the US as well as lower cost of production for Shale Oil could potentially dampen the oil prices. Therefore, the improvement can be tentative at this juncture. As it is now, we have seen the sharp fall in Petronas capital expenditure which has down by 28% for 9M2016 to RM35.9 billion from RM49.7 bilion in the corresponding period last year. In that sense, we can expect companies along the value chain especially those who involve in the upstream activities are the immediate casualties. Assets underutilisation has become common as results which can have significant impact to the cash flow and profitability among the players. In a nutshell, players are scaling back their investment in view of uncertainties in oil prices and by the same token, strong oil demand going forward. Despite that, news over Saudi Aramco taking 50% stake in Petronas RAPID would be key catalyst for the downstream and perhaps, it could free up some of the Petronas cash flow which can be redeployed to fund exploration & production (E&P) spending. This could offset some of the negativities in the sector given the need to increase investment in order to avoid possible bottle neck should demand starts to pick up its pace. For Internal Circulation Page 10

11 Chart 12: Cost of production of Shale Oil (USD per barrel) Bone Spring - Eddy NM 46.1 Spraberry - Howard TX 40.5 Eagle Ford - Karnes TX Spraberry - Martin TX Bone Spring - Ward TX Eagle Ford - DeWitt TX 33.9 Wolfcamp - Loving TX 36.3 Wolfcamp - Reeves TX 34.6 Source: Bloomberg Intelligence Chart 13: Number of oil rigs in US 1,800 1,600 1,400 1,200 1, Source: Bloomberg Manufacturing Electrical & Electronics (E&E) Neutral 1,609 - Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 The exports growth for E&E related products moderated to 2.2% for the first nine months of 2016 compared to 8.0% growth in the same period last year. On further scrutiny, Electronic Integrated Circuits (EIC) was the main factor for the slowdown given its lion share in total E&E exports (35% of total E&E exports). EIC exports fell by 0.7% in the 9M2016 from 8.3% growth in the previous period. However, telecommunication related equipment as well as electrical apparatus (16.3% of total E&E exports) posted a positive growth of 10.5% (9M2015: 1.4%) and 3.1% (9M2015: 4.4%) respectively. The sector is susceptible to global growth environment as reflected in the statistics during the year. Nonetheless, the recent forecast by World Semiconductor Trade Statistics (WSTS) indicates that global semiconductor would return to growth in 2017 and 2018 after experiencing a decline in 2015 and Already, the Global Semiconductor Sales (GSS) continue to record positive growth of 3.6% and 1.3% after 13 months of contraction since July Therefore, the E&E sector could benefit the global trend in 2017 and For Internal Circulation Page 11

12 Chart 14: Global Semiconductor Sales (GSS( y-o-y% 12.0% 10.0% 8.0% 6.0% 4.0% 3.6% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Source: Semiconductor Industry Association (SIA) Table 5: World Semiconductor Trade Statistics (WSTS) forecast summary Source: WSTS Automotive Neutral The industry suffers lower sales in 2016 as consumers are taking a cautious view on their spending plans amidst rising cost of living. This has resulted households to focus more on necessities rather than splurging into their wants. In this regards, consumers would postpone their plans for big ticket items such as vehicle. In addition, difficulties to get end-financing are also cited as the reasons for lower TIV as banks become more stringent in assessing loan application. As a result, the Total Industry Volume (TIV) fell by 13.8% to 418,445 units in the 9M2016. Among the top 10 brands, only three of them recording positive growth Mazda (+1.8%), Mercedez (+10.2%) and BMW (+20.5%. In view of this, the Malaysian Automotive Association (MAA) revised their 2016 TIV forecast from 650,000 units to 580,000 units. This represents 13% decline compared to 2015 actual figure of 666,674 units. For Internal Circulation Page 12

13 Going forward, we expect the market is likely to be more competitive and weak MYR is expected to affect the industry s cost structure. As such, margins are expected to be squeezed further. However, the luxury brands would perform relatively better as affluent segments continue to be less affected by the rising cost of living and perhaps, would have better bargaining power during this period. Table 6: Total Industry Volume (TIV) for 9M2016 Brand TIV Growth Market Share Perodua 150, % 36.1% Honda 63, % 15.1% Proton 50, % 12.0% Toyota 31, % 7.4% Nissan 24, % 5.7% Mazda 9, % 2.3% Mercedes Benz 9, % 2.2% BMW 6, % 1.5% Hyundai/Inokom 3, % 0.9% Kia 3, % 0.8% Table 7: Total Industry Volume (TIV) forecast Year Units Growth Passenger Commercial TIV Passenger Commercial TIV 2015 (A) 591,298 75, , % -3.5% 0.0% ,000 65, , % -13.8% -13.0% ,000 70, , % 7.7% 8.6% ,200 78, , % 11.4% 8.9% ,000 80, , % 2.6% 2.3% ,400 82, , % 2.5% 2.2% Source: Malaysian Automotive Association (MAA) Power Neutral The barometer for the power sector, Tenaga Nasional Berhad (TNB), recorded total revenue of RM44.5 billion for the Financial Year Ending (FYE) August This represents 2.9% growth over the same period last year. Similarly, net profit also increased by 20.4% to register RM7.4 billion. Such performance on account of higher electricity sales which saw maximum demand reached at 17,788 Megawatt (MW) on April 20 and such trajectory has been persistent in the new FYE In addition, generation mix has skewed towards coal which provided cost advantage to TNB. This was due to supply glut experienced by the coal industry which saw average coal prices fell from USD66 per MT in FYE 2015 to USD55.7 per MT in FYE Going forward, we expect Renewable Energy (RE) especially on harnessing the solar technology will be the key feature for the industry. The Government has awarded 2 utility scale solar projects, with 200 MW of generation capacity out of the 250 MW slated to fast-track RE generation. These are expected to come online by 2017 and form part of the initiative to achieve the expected RE capacity target of 2,080 MW by 2020, based on the 11th Malaysia Plan. For Internal Circulation Page 13

14 Chart 15: System Weekly Maximum Demand Source: TNB Plantation Neutral CPO prices were higher since August 2016 hovering beyond RM2,700 per MT. Production statistics suggests that the up cycle which normally happens during and 3Q of the year, has lower trajectory evidenced from contraction in CPO production on year-on-year terms. This resulted lower inventory levels which provides the necessary support to prices. The weather related factors such as El-Nino has long lasting effect this year, causing inventory to remain below 2 million MT for the most of part of 10M2016. In October, inventory level stands at 1.57 million MT, a 44.5% decline compared to previous year s level. Similarly, CPO exports were generally lower in 2016 as exports to key countries such as India, EU and China fell by 15.1%, 12.2% and 29.2% for 10M2016 respectively. Weaker output and to some degree narrower Soybean Oil premium may have impacted exports for the year. Going forward, the recovery in CPO production in 2017 should help to fill up the void in 2016 given a healthy exports market and to some extent, domestic consumption following the implementation of bio diesel initiatives by key producing countries. For Internal Circulation Page 14

15 Table 8: Crude Palm Oil statistics 000 metric tonne Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Opening stocks 2,634 2,309 2,170 1,886 1,804 1,650 1,775 1,770 1,464 1,546 Production 1,130 1,043 1,219 1,301 1,365 1,533 1,585 1,702 1,715 1,678 Y-o-Y -2.7% -7.0% -18.4% -23.2% -24.6% -13.1% -12.7% -17.0% -12.5% -17.6% M-o-M -19.3% -7.7% 16.9% 6.7% 4.9% 12.3% 3.4% 7.3% 0.8% -2.2% Exports 1,279 1,089 1,336 1,173 1,282 1,142 1,385 1,824 1,451 1,431 Y-o-Y 7.3% 11.9% 13.0% -0.4% -21.1% -32.7% -14.0% 13.4% -13.7% -16.4% M-o-M -13.8% -14.9% 22.7% -12.2% 9.3% -11.0% 21.3% 31.7% -20.4% -1.4% Imports Y-o-Y -59.2% 6.4% 79.1% -35.7% -80.2% -81.0% -91.0% -88.2% -97.6% -63.4% M-o-M -56.1% 84.4% 10.2% -43.9% -52.1% -1.9% -34.7% -39.1% -77.0% % Consumption Y-o-Y -32.0% -32.9% 4.5% -2.0% 12.1% 6.8% -6.3% -30.1% -10.6% 20.1% M-o-M -23.2% -24.8% 51.8% 3.8% 1.7% 11.5% -23.7% -11.9% -4.5% 34.2% Closing stocks 2,309 2,170 1,886 1,804 1,650 1,775 1,770 1,464 1,546 1,574 Y-o-Y 31.0% 25.0% 1.5% -17.3% -26.3% -17.1% -21.6% -41.2% -41.5% -44.5% M-o-M -12.4% -6.0% -13.1% -4.3% -8.5% 7.6% -0.3% -17.3% 5.6% 1.8% Stock-to-usage Sources: CEIC & MPOB Table 9: Top 10 CPO export by country ( 000 MT) in 10M 2016 Country Export growth share India 2, % 18.8% EU 1, % 12.8% China 1, % 11.2% Pakistan % 5.2% Philippines % 3.9% United States % 3.8% Turkey % 3.8% Vietnam % 3.5% Bangladesh % 3.0% Japan % 2.8% Telecommunications Neutral The redistribution of telecommunications spectrum via bidding process will be the key feature for the industry apart from intense competition at a market place. Higher capital expenditure in order to retain or acquire the new spectrum is expected to have important implication to telcos balance sheet especially for the upfront assignment fees. The upfront could come in at about 44% of total spectrum fees. The MCMC has recently announced spectrum fees ranging between RM1.1 billion to RM1.9 billion for the 900 MHz and 1800 MHz spectrum bands. The market has been increasingly become more mature with penetration rate for cellular phones currently stand at 140.9% as of However, there is room for broadband industry to expand further given the penetration rate is only 76.8% during the The move towards digital economy would entail more capital expenditure among the industry players in order to stay relevant in the market and to maintain the economies of scale. For Internal Circulation Page 15

16 Chart 16: Penetration rate (%) Cellular phone Broadband Education Neutral The Budget 2017 which was announced on 21 October, saw massive cuts in allocation for the public universities. In 2017, the total allocation for 20 public universities will be slashed by 19.23% to RM6.12 billion from this year s budget of RM7.57 billion. It is uncertain as to how it may impact on tuition fees as 90 percent of the total public universities are relying on government funding. In addition, it could compromise the research capability among the public universities to pursue their research interest as such initiative is heavily reliant on research grant from the government. Meanwhile, the skill gap in the labour market is still much very prevalent and therefore, the need for up skilling will definitely help to promote the sector s growth. As of 2014, the ratio of those who employed with tertiary education accounted for 26.7% as of While rising, the ratio is still fall short from the 2020 target of 35% as stipulated in the National Transformation Programme (NTP). Chart 17: Public universities enrolment 570, , , , , , , , , , , , , , ,000 Source: Department of Statistics *January August * For Internal Circulation Page 16

17 Chart 18: Ratio of labour force by educational attainment (tertiary) 40.0% 35.0% 35% 30.0% 25.0% 20.0% 15.0% 10.0% 6.9% 8.8% 11.1% 14.5% 19.2% 23.5% 26.7% 5.0% 0.0% F Source: Department of Statistics Property (Residential) Neutral The sector is severely dented by the slowing economy in Total new launches for residential properties declined to 10,655 units in the 1H2016. This was markedly lower compared to 70,646 units launched in House prices were generally rising at a slower pace with House Price Index (HPI) decelerated to 5.3% y-o-y in the Again, house prices were in stark contrast to 11% to 12% during 2012 and The authorities especially the BNM is unlikely to reverse their responsible lending guideline which was announced in 2013 despite calls from the industry players. The pressing issues in the industries is the provision of affordable houses given that house prices are generally beyond to those who resides in the urban area. In particular, median household income in Malaysia is around RM4,585 per month in Therefore, affordable house prices should be around RM165,060 if we ascribed to 3 times of annual salary as a yardstick for affordable house prices. Based on 11 th Malaysian Plan (11MP), a total of 653,000 units of affordable houses will be built between 2016 and Therefore, the sector will focus on this segment as the government is pushing for raising the house ownership rates. Chart 19: New residential property launches 80,000 70,000 60,000 50,000 50,855 43,355 45,286 55,860 60,305 65,248 70,646 40,000 30,000 20,000 10,000 10, H 2016 Source: National Property Information Center (NAPIC) For Internal Circulation Page 17

18 Chart 20: House Price Index Y-o-Y% 13.0% 12.0% 11.0% 11.3% 10.0% 9.0% 9.6% 8.0% 7.0% 6.0% 5.0% 12 3Q Q Q Q Q Q Q Q % Table 10: Targets for Public Affordable Housing during 11MP Programme Accronyms Housing Unit Program Bantuan Rumah PBR 47,000 Pogram Perumahan Rakyat PPR 50,000 Perumahan Rakyat 1Malaysia PR1MA 380,000 Perumahan Penjawat Awam 1Malaysia PPA1M 88,000 Rumah Mesra Rakyat 1Malaysia RMR1M 55,000 Rumah Wilayah Persekutuan RUMAWIP 33, ,000 Source: 11MP Banking Neutral In tandem with slowing economy, total loans growth continue to decelerate 4.5% y-o-y in October 2016 from 7.9% and 9.3% in 2015 and 2014 respectively. Additionally, there was a slight deterioration in asset quality with average Gross and Net Impairs Loans Ratio rose from 1.62% and 1.22% in 10M2015 to 1.64% and 1.24% in 9M2016 respectively. Meanwhile, CET1, Tier 1 Capital and Total Capital Ratio (TCR) are all rising to 13.3%, 14.3% and 16.7% as of October 2016 from 12.8%, 13.8% and 16.1% in December 2015 respectively. Malaysian banks have been actively raising their capital in order to comply with Basel III requirement. This, to some extent, should alleviate concern on the sector s ability to expedite the intermediation process. In view of the economic uncertainty, banks are expected to be more risk adverse in particular on industries which experiencing large over capacity. In addition, prospects for lower rates amidst intense competition to secure deposit would entail lower net interest margins going forward. However, banks are expected to capitalize on the advent of Financial Technology (FINTECH) companies in order to extend their market reach and to gain certain degree economies of scale. For Internal Circulation Page 18

19 Chart 21: Loans growth y-o-y% 14.0% 12.0% 10.0% 8.0% Household loans Loan growth 6.0% 4.0% 5.4% 4.5% 3.2% 2.0% 0.0% Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Business loans Chart 22: Gross Impaired Loans (GIL) and Net Impaired Loans (NIL) Ratio (%) Gross impaired loan ratio Net impaired loan ratio Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Property (Shop Units) Cautious Properties overhang for shop units rose to 5,024 units in the 2016 after declining to 4,438 units in the preceding quarter. This represents 13.2% increases compared to the previous quarter. Similarly, new launches also increased by 15.2% from the previous quarter to 13,012 units in the State of Johor remained at the top spot in terms of unsold units which also has risen to 1,517 units in the 2016 from 1,433 units in the previous quarter. This was followed by state of Perak (690 units in 2016 vs. 620 units in 1Q2016), Malacca (638 units in 2016 vs. 531 units in 1Q2016) and Negeri Sembilan (579 units in 2016 vs. 442 units in 1Q2016).The sectors prospects in the near term will remain cautious as it will take some time to clear the overhang shop units. However, themes such as urbanisation would play a critical role in creating demand for shop units in the long run. For Internal Circulation Page 19

20 At the moment, urbanization rate stands at 74% as of 2014 and it is expected to reach 75% in 2020 and 80% in 2030 as per 11 th Malaysian Plan Target. In addition, the number of Malaysian population is envisaged to reach 41.5 million from 31.9 million in 2016 based on the latest projection by the Department of Statistics. Chart 23: Unsold units for shop houses 5,500 5,000 4,785 4,810 4,709 4,781 4,974 4,972 5,024 4,500 4,162 4,324 4,438 4,000 3,500 3,000 1Q Q Q Q Q Source: NAPIC Chart 24: Unsold units for shop houses by states 1,600 1,400 1,200 1,000 1Q ,517 1, Source: NAPIC Textile Cautious Exports of textile related products have been generally higher in 9M2016 thanks to weak MYR/USD. For instance, total exports of Textile Yarn, Fabrics and Made-up Articles rose by 10.0% growth in the 9M2016 from 1.5% in the same period last year. Production activities in the related sector also sustained at 7.2% during the same period (9M2015: 7.7%). For Internal Circulation Page 20

21 The recent winning of President-Elect, Donald Trump on 8 November election has led to uncertainty to the Trans Pacific Partnership (TPP) agreement given his election promises to make U-turn in this regard. This is especially relevant as Malaysia s textile industry is likely to be the main beneficiaries from the TPP implementation. While information is still scant at this juncture, we believe the ongoing negotiation on other multilateral trade agreement such as Regional Comprehensive Economic Partnership (RCEP) could alleviate such concern in view of multiple countries including China which are involves in such agreement. Chart 25: Textile export growth 50.0% 45.5% 40.0% 30.0% 20.0% 10.0% 0.0% 30.7% 30.6% 13.8% 12.1% 10.0% 11.2% 14.1% 11.2% 7.9% 5.8% 1.5% 13.9% 2.4% 38.7% 21.4% 13.2% 9.6% 1.8% 9M % -1.4% -3.0% -4.5% 9M2016 Chart 26: Textile production growth 25.0% 20.0% 9M2015 9M % 10.0% 7.7% 7.2% 4.0% 4.0% 4.6% 5.0% 3.5% 1.4% 1.4% 0.1% 0.0% 14.9% 12.6% 21.8% 19.2% 9.1% 8.8% 9.0% 7.1% 4.5% 5.0% 14.5% 11.2% -5.0% -10.0% Textiles, Wearing Apprarel, Leather Product, Footwear (TW) Textiles -7.4% Spinning, Preparation Weaving & & Spinning Finishing of Textile Textiles Fibres Weaving of Textiles -5.0% Dyeing, Wearing Bleaching, Apparel, exp Printing of Fur Apparel Yarns & Fabrics Leather & Related Products (LR) Tanning & Dressing: Luggage & Handbags Footwear -2.5% Leather Footwear Rubber Footwear For Internal Circulation Page 21

22 Trading / Retail Avoid Weak consumer sentiment is likely to have important implication to the sector s performance as households become increasingly cautious to spend on discretionary items. The latest measure on Consumer Sentiment Index (CSI) fell to 73.6 points in the 3Q2016 from 78.5 points in the preceding quarter. Rising retail floor space in key markets such as Klang Valley, Penang and Kota Kinabalu is also another factor to look out for in assessing the sector. Excess floor essentially would exert downward pressure on rental rates. The same is also true for sub market especially in Southern Region such as in Seremban and Malacca. In Seremban, retail centres in the pipeline are AEON and Mydin supermarket, both in Senawang. The completion of these new projects are expected to exert pressure on the existing hypermarkets in the vicinity, i.e. Giant, TESCO and Kip Mart. Similarly in Malacca, Hatten City in Melaka Raya as well as Harbour City and the Riviera in Pulau Melaka are amongst the projects in the pipeline, which are scheduled for completion between years 2016 and Newly completed mall, The Shore Shopping Gallery offered only retail lots for leasing purpose. In additional, the first premium outlet, Freeport A Famosa Outlet Melaka was officiated in November 2015, houses a variety of designer brands and fashion items. Chart 27: Retail space rental rate (RM per square ft) Source: CH William & Talhar Klang Valley Johor Bharu Kuching Penang Kota Kinabalu Steel Avoid The rises in steel prices recently have been a boon to the sector. China s government efforts to curb the excess capacity in the sector appear to have an impact to domestic steel prices since early January However, the nature of the adjustment looks somewhat tentative given the sharp fall during the month of May but prices have started to increase again in July albeit gradually. The excess capacity in China s steel market is still prevalent with installed capacity stands at 1200 million metric tonne (MT) in 2015 while the country only produced 804 million MT during the same year. This imply only 67% of the installed capacity has been used, suggesting China might want to export more of its steel products in order to clear all of the excesses. Already, Malaysia s trade deficits in steel market continue to widen to 5.6 million MT in 2015, higher from 1.8 million recorded in 2007 given imports is much higher than exports. As such, the sector is unlikely to regain strong footing despite the ongoing implementation of infrastructure projects in Malaysia. For Internal Circulation Page 22

23 Chart 28: China s domestic steel price (USD per MT) Source: MISIF Chart 29: China s steel market (Million MT) Capacity Production Exports 1, Source: MISIF For Internal Circulation Page 23

24 Chart 30: Malaysia s trade deficit in steel ( 000 MT) 0-1,000-1,020-2,000-1,807-1,847-3,000-2,671-2,441-2,872-4,000-5,000-6,000-4,820-4,966-5, Source: MISIF Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission For Internal Circulation Page 24