Monday, 17 July 2017

(The Star) Can the uptrend in Malaysia's manufacturing sector hold up?

With the continuous uptrend in manufacturing, a question at this point is whether this can hold up for the long term. Views range from positive to uncertain, indicating that investors may have to look selectively at the various segments of manufacturing.

“The manufacturing sector is gaining traction, thanks to improved global demand for electronics and domestic market-oriented industries such as food and construction-related materials.

“The current expansion trail of manufacturing should continue into next year, going by global lead indicators such as purchasing managers’ indices for manufacturing and services, sustained demand for chips and continued strong domestic spending on construction,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.

The manufacturing sector expanded by a higher rate of 7.3% in May compared with 6.7% in April and 5.6% in the first quarter of this year.

“It is unlikely to revert to a period of low or flat growth unless there is a big letdown from the dampening effect of inward-looking policies of advanced countries,’’ said Lee.

“I can’t say the improving trend will hold for all manufacturing stocks. It is more for export-oriented ones,’’ said Pong Teng Siew, head of research, InterPacific Securities.

“The improvement in manufacturing trend is likely to continue, at least, into the second half of this year.

With still relatively low inflation, there is likely to be low risk of aggressive monetary policy, which is positive for consumption.

“With sustained although uneven global growth, coupled with a stable currency, exporters with expanded capacity, new or enhanced customer base or contracts, are likely to benefit,’’ said Pong.

“Manufacturing data has been stronger than I expected,’’ said Chris Eng, head of research, Etiqa Insurance & Takaful.

“The usual players like Inari and Globetronics remain the best bets.’’

As to whether this is a sustained uptrend, “we will know by next month if the iPhone sorts out its fingerprint scanner problem for the iPhone8,’’ said Eng.

Global markets got a lift following US Fed chair Janet Yellen’s statement that interest rate hikes would be gradual.

That may be a signal to party on for markets but the Malaysian stock market is said to suffer from a lack of liquidity.

“Too much hinges on foreign fund flows. There is not enough domestic liquidity,’’ said Pong.

“Foreign fund flows are temporary. They flow where there are profits to be made. “They probably think opportunities for latching onto value has diminished sufficiently to step back somewhat but the flows have not yet turned into outflows consistently.

“There may be a lull before we see fresh inflows or it may turn into consistent outflows. That will depend on corporate profits, going forward,’’ said Pong.

Given current estimates, the US federal funds rate “would not have to rise all that much further” to reach a neutral level that neither encourages nor discourages economic activity, said Reuters, quoting Yellen in her prepared testimony before Congress.

The Fed still feels the economy needs loose, or accommodative, monetary policy, so a lower neutral rate means the Fed may feel compelled to slow the pace of rate hikes down the road, said Reuters.

“I expect the market to resume its uptrend in the second hall, although it may not be as good as the first half.

“This is gauging from our upbeat expected gross domestic product growth for the full year on better manufacturing data and exports.

“Traditionally, there would be more contracts announced in the second half, and this would translate into better corporate earnings, at least in the second half, if not longer,’’ said Wong.

“Markets are addicted to liquidity. A comment from the Fed that interest rate tightening will be gradual will be welcome.

“But we will have to see how the European Central Bank (ECB) plans to unwind its bond buying programme or quantitative easing that had supported markets following the financial crisis,’’ said Eng.

The ECB is likely to signal in September that its bond-buying scheme will be gradually wound down next year and could give the next clue on the plans in late August, said Reuters.

The world’s biggest oil producers are starting to take electric vehicles (EVs) seriously as a longterm threat, and EV sale targets could dampen demand in some parts of Asia as early as 2018, said the Organisation of Petroleum Exporting Countries (Opec) in its oil market report.

Growing popularity of EVs increases the risk that oil demand will stagnate in the decades ahead, raising questions about the more than US$700bil a year that’s flowing into fossilfuel industries, said Bloomberg.

Opec raised its 2040 EV fleet prediction to 266 million from the 46 million it anticipated a year ago.

The world’s top automakers are even more optimistic and have a combined plan to sell six million EVs a year by 2025, rising to eight million in 2030, said Bloomberg.

Columnist Yap Leng Kuen welcomes the decade of electric cars.