• Malaysia's IPI increased by 3.1%
   
• Manufacturing slowdown offset by faster gains in electricity and mining
   
• Manufacturing sector's sales value rose moderately by 0.7%

• Manufacturing sector employment increased slightly by 0.6%.

• Despite moderation, manufacturing is still anticipated to improve in 2024

Malaysia's Industrial Production Index (IPI) rose to 3.1% in February. Moderation primarily resulted from slower output growth in the Manufacturing sector, which expanded by 1.2% (Jan: 3.7 %). However, the Mining and Electricity sectors continued to accelerate, with growth rates of 8.1% (Jan: 5.0%) and 10.9% (Jan: 8.3%), respectively. Compared to the previous month, the IPI saw a decline of 6.3%, marking a shift from the positive growth (Jan: 2.0%).

The Manufacturing sector's output grew by 1.2% YoY, following a growth rate of 3.7% in January. The increased in the Manufacturing output was supported by domestic-oriented industries, which expanded by 3.8% YoY (Jan: 8.0%). The growth in domestic-oriented industries was mainly propelled by the Manufacture of fabricated metal products, except machinery & equipment, which saw an 8.4% increase. This was followed by a 5.1% growth in the Manufacture of other nonmetallic mineral products, and a 2.9% increase in the Manufacture of motor vehicles, trailers & semi-trailers. Compared to the previous month, domestic-oriented industries experienced a decline of 7.5% (Jan: 4.9%).

In the meantime, the export-oriented industries returned to negative territory with a mild contraction of 0.1% YoY in February (Jan: +1.6%). The contraction was mainly due to the decrease in the Manufacture of vegetable & animal oils & fats (-13.5%); the Manufacture of chemicals & chemical products (-2.8%); and the Manufacture of electrical equipment (-2.2%). This was consistent with the country's export performance, which registered a downturn of negative 0.8% in February after experiencing positive growth in the preceding month. In a month-on-month comparison, the export-oriented industries slipped by 5.7% after recording a slight growth of 0.2% in January.

The Mining sector continued its upward trend, expanding to 8.1% (Jan: 5.0%). The increase was driven by double-digit growth of 11.9% in Natural Gas production (Jan: 6.6%), while Crude Oil & Condensate output maintained steady growth at 2.5% (Jan: 2.6%). However, compared to January 2024, the Mining index declined by 6.9%, contrasting with the positive 3.1% registered in the previous month.

Electricity generation accelerated at a faster pace of 10.9% in February (Jan: 8.3%). However, the Electricity sector declined by 4.5% MoM, following a positive growth of 2.0% in January.

The Manufacturing sector's sales value saw a slight increase of 0.7% to RM146.2bn in February (Jan: 3.2%). The increase was driven by growth in the Transport equipment & other manufactures sub-sector at 7.3%, as well as the Non-metallic mineral products, basic metal & fabricated metal products sub-sectors, which grew by 5.7%. At the same time, the sales value of the Electrical & electronics products sub-sector, which represented 34.1% of the total sales, increased by 1.3%. Compared to the preceding month, the sales value of the Manufacturing sector decreased by 4.3% compared to the RM152.7 bn recorded in January, which had experienced an uptick of 1.9%.

The sales value of export-oriented industries which represented 69.6% of total sales declined by 1.3% YoY in February (Jan: 0.1%), largely attributable to the continuous contraction in the Manufacture of coke & refined petroleum products, which registered a negative 8.8%. Additionally, the Manufacture of vegetable & animal oils & fats; and the Manufacture of chemicals & chemical products slipped by 6.0% and negative 2.6%, respectively. As compared to the preceding month, the sales value of export-oriented industries dropped by 3.6% after recording a positive growth of 1.7% per cent in January 2024. In the meantime, the momentum of sales value for domestic-oriented industries remained positive, expanding by 5.6% YoY in February 2024 (Jan: 10.8%). The expansion was primarily bolstered by the increases registered in the Manufacture of fabricated metal products, except machinery & equipment (9.1%); Manufacture of motor vehicles, trailers & semi-trailers (9.0%); and Manufacture of food processing (5.2%). As compared to the previous month, the sales value of domestic-oriented industries decreased by 5.8% as compared to the positive 2.3% recorded in January.

Steady manufacturing employment. The Manufacturing sector employed 2.37mn workers in February, marking a 0.6% increase compared to the 2.35mn persons employed in February 2023. The increase was primarily contributed by the Food, beverages & tobacco sub-sector at 4.3%, followed by the Textile, wearing apparel, leather & footwear sub-sector at 1.7%, and the Non-metallic mineral products, basic metal & fabricated metal products sub-sector at 1.4%. On monthly basis, the number of employees in this sector continued to decline, with a drop of 0.3% (Jan: -0.1%)

Outlook

Looking forward, we anticipate sustained growth in the domestically oriented sector despite potential challenges in external demand affecting monthly production rates in the first half of 2024. The recent reading aligns with declines in major economies like Vietnam, Japan, Thailand, Taiwan, and the US. South Korea's industrial production growth also slowed in February 2024. Recent data shows moderation, with increased production expected in domestic sectors due to heightened consumer confidence. However, export demand may face challenges from slower global growth and geopolitical tensions. Our 2024 IPI forecast remains at 3.5%.

Manufacturing sales increased by 0.7% to RM146.2bn in February, down from the 3.2 YoY growth seen in January. This corresponds with the IPI’s moderation, mainly due to slower output growth in manufacturing. Malaysian manufacturers expressed hope for future improvement while also voicing concerns about lingering demand weakness. Despite the PMI easing (Feb: 48.4; Jan: 49.5), a gradual production recovery is anticipated in 2024. China's strong March factory activity may impact Malaysia with a lag of 1-2 quarters. Nonetheless, caution remains due to global trade's vulnerability to geopolitical tensions, supply chain disruptions, and commodity price uncertainties. Still, recovery is expected in 2024.

Source: BIMB Securities Research - 9 Apr 2024

• Growth in Distributive Trade Sales Grew 5.5% YoY in February
   
• All Sub-sectors Recorded Positive Growth
   
• Global retail sales rebound in February

• Resilient consumer demand amid a healthy labor market and softening inflation pressure to support growth momentum in retail spending

Malaysia’s Wholesale & Retail Trade recorded sales value of RM141.1bn in February 2024, grew 5.5% YoY. The positive growth was contributed by all subsectors.

Sales of retail trade registered a growth rose 5.8% YoY or RM3.4bn to register RM61.5bn. Growth was supported by Retail Sales in Non-specialised Stores which grew 6.7% (Jan: 2.2%) or RM1.5bn to RM23.6bn. Other groups in this sub-sector also recorded positive growth namely Retail Sale of Other Goods in Specialised Stores (Feb: 9.5%; Jan: 4.9%), Retail Sale of Food, Beverages & Tobacco in Specialised Stores (Feb: 8.0%; Jan: 6.2%) and Retail Sales of Cultural & Recreation Goods (Feb: 5.4%. Jan: 1.1%). Wholesale trade sub-sector also expanded by registering 5.2% YoY or RM3.1bn and generated sales value of RM62.2bn. The increase was supported by Other Specialised Wholesale which rose RM1.6bn or 7.4% to RM23.7bn. This was followed by Wholesale of Agricultural Raw Materials & Live Animals (Feb: 5.6%; Jan: 4.2%), and Non-specialised Wholesale Trade (Feb: 5.4%; Jan: 4.3%). Sales value of motor vehicles expanded with a growth of 5.4% or RM0.9bn to settle at RM17.4bn. The increase was fuelled by Sales of Motor Vehicle Parts & Accessories which surged 13.7% (Jan: 11.9%) or RM0.6bn to record RM4.9bn. This was followed by Maintenance & Repair of Motor Vehicles (Feb: 14.1%; Jan: 12.4%) and Sales of Motor Vehicles (Feb: 0.2%; Jan: 20.9%). Total Industry Volume (TIV) for February 2024 decreased by 4% MoM to 62,833 units whilst on YoY basis, TIV edged down by 1.1%.

On a monthly basis, sales value of wholesale & retail trade recorded negative growth for two consecutive months with -0.9%, contributed by Wholesale Trade which slipped -2.3%, followed by Motor Vehicles sub-sector which contracted -1.4%. In contrast, Retail Trade sub-sector registered a positive growth of 0.7% for the month.

Global retail sales rebound in February

Consumer spending was mixed in February. The monthly report on how consumers are spending or pulling back is viewed as a harbinger for the state of the advance economy. The February spending shows the consumer is still robust but not as strong as expected. Retail spending in the US was back in positive territory in February, after a sizeable decline to start the year. Higher borrowing costs and elevated prices are challenging households but spending is still being fuelled by a robust job market and rising wages. On the other hand, the Asia region retail sector has embarked on a recovery journey following the disruption of the global pandemic. While external headwinds persist worldwide, the resurgence in international tourism and the resilience exhibited at the domestic level bode well for growth in consumer spending.

Retail sales in the US were up 0.6% MoM in February, following an upwardly revised 1.1% fall in January. The relatively modest increase, combined with a larger decline in January, suggests a potential slowdown in consumer spending. Excluding autos, sales were up 0.3%. US retail sales increased 1.5% YoY, following a flat reading in January. Eurozone retail sales decreased in February due to lower demand for both food and non-food items. Retail sales fell -0.5% MoM in February after staying flat for the month of January, which was revised down from a 0.1% gain. On an annual basis, retail sales fell by 0.7%, extending the streak of contraction to the 17th consecutive month. Meanwhile, Retail sales in the UK remained unchanged in February, following an upwardly revised 3.6% increase in January. Heavy rain contributed to falls in sales at food and household goods stores but boosted online shopping. Year-on-year, retail trade was down by 0.4% in February, partially reversing a 0.5% advance in January .

Meanwhile, retail sales across Asian economies remained strong, supported by spending on Lunar New Year. Retail sales in Japan rose 4.6% YoY in February, accelerating from a downwardly revised 2.1% gain in January. It was also the 24th consecutive month of expansion in retail sales as consumption in Japan continued a healthy streak. On a monthly basis, retail sales increased by 1.5% in February, accelerating from a downwardly revised 0.2% gain in January. The performance of China’s economy in the first two months of 2024 showed sluggish household consumption. China's retail sales Retail sales growth slowed and increased by 5.5% YoY in January-February 2024 combined, but the figure was down from December, which saw an increase of 7.4%. Still, it was the 13th straight month of growth in retail trade. The recording period included China’s major Lunar New Year holiday — this year falling in early February — which generally drives a consumption spike in the preceding weeks. The momentum was near flat in February at 0.03% MoM following gains of 0.17% MoM in January and 0.25% MoM in Decembre. This is the 7th straight month of sequential gains. Singapore’s Feb retail sales expanded 3.0% MoM (Jan revised: -0.5%), translating to a strong 8.4% YoY increase (Jan revised: 1.6%), owing to the Lunar New Year seasonality, with a sharp increase seen in components that tend to see strong demand during the festivities such as F&B, supermarkets, and clothing & footwear. Excluding motor vehicle sales, retail sales posted a robust 9.4% YoY, reversing the small -1.8% YoY contraction in January. We anticipate a stronger retail performance in tourist destinations within Asian region, bolstered by an influx of either international or domestic tourists.

Outlook

Malaysia's distributive trade remained resilient with growth of 5.5% YoY in February although monthly growth remained negative. Meanwhile, Malaysia’s retail sales grew by 5.8% YoY in February (Jan: 2.6%), marking its fastest pace in five months, while on monthly basis retail sales rebounded into the positive territory (Feb: +0.7%; Jan: -2.1%), partly attributed to increased spending during the Chinese New Year holiday. The strong consumer spending was also supported by robust labor market conditions, with the unemployment rate returning to pre-pandemic level of 3.3% since November 2023. The stronger consumer spending was also reflected in the performance in online retail sales which went up 0.4% YoY in February (Jan: -1.6%). For seasonally adjusted value, the index edged up 0.4% as against the previous month.

Overall, Malaysia’s consumer demand remained resilient and is in tandem with the healthy job market development and softening inflationary pressure. The value of total retail sales remained above RM60bn for seven consecutive months, alongside the revival of inbound tourism.

Year-to-date, the recovery in tourist arrivals from China has been promising, likely bolstered by the 30-day visa exemption. In 2023, Malaysia received a total of 1.47mn tourists from China and Tourism Malaysia is confident the target of attracting over five million tourists from China can be achieved this year. Visa free entrance for China, India and Middle East, along with the weaker ringgit, are the main drivers boosting the country’s tourism market. The weak ringgit will make the country’s tourist products cheaper and more attractive for budget travellers. In 2023, Malaysia recorded 20.1 million tourist arrivals, generating RM71.3bn in tourism income. The Ministry of Tourism, Arts, and Culture anticipates tourist arrivals in Malaysia to reach 27.3mn, with an expected income of RM102.7bn, in 2024.

Looking ahead, we expect retail sales growth to be driven by strong domestic demand, supported by a stable and lower unemployment rate. This positive outlook is reinforced by the continued increase in tourist arrivals and spending. However, risks to our forecast include the impact of subsidy rationalisation, which could potentially dampen consumer spending and subsequently affect sales growth.

Source: BIMB Securities Research - 9 Apr 2024

• Consistent growth in both labor force and employment
   
• The number of unemployed persons continued to decline

• Unemployment rate maintained at 3.3%

• Participation rate remained steady at its record high of 70.2%

• Varied unemployment rate across advanced economies

• Labor market in Malaysia is anticipated to improve further

OVERVIEW

Malaysia’s labor force continued its strong performance in February 2024, supported by an improved economic and business outlook. The labor force in February 2024 experienced further improvement, growing by 0.1% MoM to 17.07mn persons. The number of employed persons continued to rise, increasing by 0.2% MoM reaching a record of 16.51mn persons. Meanwhile, the number of unemployed persons continued their downward trend, with a marginal drop of 0.1% to 567.0 thousand persons. The unemployment rate remained constant for the fourth straight month in February at 3.3% (Jan: 3.3%), maintaining its lowest since January 2020. The labor force participation rate remained stable at 70.2%.

Malaysia’s labor market conditions stayed stable in February, showing a greater capacity to create jobs. This aligns with the ongoing improvement in the national economic situation and is in line with the global economic expansion.

In February 2024, the number of employed persons continued in an upward trend, with a rise of 0.2% MoM (+24.9k persons) to register 16.51mn persons (Jan: 16.48mn). Year-on-year, the number of employed persons increased by 2.0% (+318.6k persons) compared to the same month in the previous year (Feb’23: 16.19mn persons).

During the month, the employment-to-population ratio, which indicates the ability of an economy to create employment, maintained at 67.9% (Jan: 67.9%). Comparatively, this ratio posted 0.5 percentage points growth from 67.4% in February 2023.

Across various economic sectors, the Services sector saw a continued increase in employed persons, especially in Wholesale & retail trade, Food & beverage services, and Transportation & storage activities. Similarly, the Manufacturing, Construction, Mining & quarrying, and Agriculture sectors also experienced a rise in employed persons in February 2024.

By employment status, most of the employment were from the formal sector (employees: 75.2%, employers: 3.6%), against informal sector (proxied by ownaccount workers) that constituted 18.3% of total recruitment in February. The

remaining 3.0% were unpaid family workers. Employment in the employees' category increased slightly by 0.1% MoM to 12.41mn persons (Jan: 12.39mn persons). Similarly, own account workers sustained its growth expansion and increased 0.3% MoM to 3.02mn persons (Jan: 3.01mn persons).

Meanwhile, the number of unemployed persons declined further, with a marginal drop of 0.1% MoM to 567.0k thousand persons (Jan: 567.3k persons). February’s unemployment rate remained at 3.3% as registered in the previous month. On an annual basis, the number of unemployed persons declined by 4.2% (-24.9k persons) compared to 591.9k persons in February 2023. Accordingly, the unemployment rate dropped by 0.2 percentage points from 3.5% in February last year.

The youth unemployment rate (aged 15-24) remained at 10.6% for four consecutive months, recording the number of unemployed youths at 306.6k persons (Jan: 10.6%; 306.8k persons), while the unemployed rate for those aged between 15-30 years reduced to 6.6% with 434.8k unemployed youths (Jan: 6.7%; 439.7k persons). In terms of the unemployment category, 79.8% were actively unemployed, meaning they were available for work and actively seeking jobs. This category dropped by 0.04% to record 452.4k persons (Jan: 452.5k persons).

The labor force in February 2024 saw further improvement, rising by 0.1% MoM to 17.07mn persons (Jan: 17.05mn persons). The labor force participation rate (LFPR) remained steady at 70.2%, as in the preceding month. Compared with the same month of the previous year, the number of labor force enhanced by 1.8% YoY or equivalent to 293.7k persons (Feb’23: 16.78mn persons). Therefore, the LFPR was higher by 0.3 percentage points from 69.9% in February 2023.

The number of persons outside the labor force posted a slight decline of 0.01% MoM to 7.23mn persons (Jan: 7.23mn persons). On an annual basis, the number of outside labor force fell by 0.1% from 7.24mn persons in February last year. The major composition of those outside the labor force was housework/ family responsibilities, accounting for 42.5%, while schooling/training ranked second with 41.0%.

Varied unemployment rate across advanced economies

US jobless rate was moderated to 3.8% in March 2024. Meanwhile, according to ADP payroll data, the US private sector employment grew 184k in March (Feb: 155k). On the other hand, the Job Openings and Labor Turnover Survey (JOLTS) continued to show labor demand and supply in the US coming into a better balance with job openings rising slightly in February to 8.76mn from 8.75mn (revised) reading in the prior month. The Eurozone’s unemployment rate remained stable at 6.5% in February. Japan’s unemployment rate stood at 2.6% in February 2024, rose slightly from the previous month.

OUTLOOK

Malaysia's unemployment rate held steady at 3.3% in February, maintaining its lowest since January 2020. The labor force participation rate remained at a record high of 70.2%, with the total labor force slightly surpassing the total working population. We anticipate the labor market to stay stable throughout 2024, given the ongoing employment growth observed in recent months. Anticipating stable hiring due to economic expansion, manufacturing recovery, increased investments, infrastructure spending, and improving tourism. The situation is expected to drive higher employment demand, crucial for sustaining

economic stability. We maintain our stance that the unemployment rate will remain stable at 3.3% this year, representing a technically full employment level.

The downside risks to domestic labor market among others include geopolitical tensions, slower external trade recovery, and cautious business sentiment due to domestic policy reforms.

Source: BIMB Securities Research - 9 Apr 2024

• US non-farm payroll employment rose 303k in March
   
• Revisions to the two prior months were higher, adding 22k from the previously reported figures

• Unemployment rate ticked down to 3.8%

• Average hourly earnings increased by 0.3% MoM, 4.1% YoY

• Labor force participation rose to 62.7%

• March jobs report shows labor market and US economy are still going strong

The US employers delivered another outpouring of jobs in March, adding a sizzling 303,000 workers to their payrolls and bolstering hopes that the economy can vanquish inflation without succumbing to a recession in the face of high interest rates. Job gains in the two prior months were also revised higher with the change in total nonfarm payroll employment for January was revised up by 27,000, from 229,000 to 256,000, and the change for February was revised down by 5,000, from 275,000 to 270,000. With these revisions, employment in January and February combined is 22,000 higher than previously reported.

Though most industries added jobs last month, hiring was mainly concentrated in three categories: healthcare and private education, leisure and hospitality and government accounted for nearly 69% of the hiring. The bulk of service sector gains (212k) concentrated in health care & social assistance (81.3k) and leisure & hospitality which grew by 49k jobs and, in a major milestone, finally caught up to its February 2020 pre-pandemic levels, as demand for dining out and other experiences has continued to swell. Government hiring remained robust in March, adding 71k jobs mostly in local government, as the sector has remained flush with cash. Job growth has also begun to spread into industries that had gone slack over the past year. Hiring across the construction sector (+39k) rose by the fastest pace in nearly two-years. Retail added 18k jobs, mostly in general-merchandise employers.

The unemployment rate dipped from 3.9% to 3.8%. The jobless rate has now remained below 4% for 26 straight months, the longest such streak since the 1960s. The labor force participation rate rose to 62.7% Average hourly earnings were up 0.3% MoM and rose 4.1% YoY.

The household survey's separate measurement of employment also showed a robust gain of 498k in March, which far outstripped the 29k decline in the number of unemployed and led the labor force to expand by 469k. Consequently, the unemployment rate ticked down 0.1 percentage points to 3.8% while the labor force participation rate rose 0.2 percentage points to 62.7% and the employment-population ratio at 60.3%. The labor force's improvement coincides with labor demand stabilizing at an elevated level and quits moving sideways at a low level. The unemployment rate has been in a narrow range of 3.7% to 3.9% since August 2023. A broader measure that includes discouraged workers and those holding part-time positions for economic reasons held steady at 7.3%.

Normally, a blockbuster bounty of new jobs would raise concerns that a vibrant labor market would force companies to sharply raise pay to attract and keep workers, thereby fanning inflation pressures. But the March jobs report showed that wage growth was mild last month, which might allay any such fears. Average hourly wages were up 4.1% YoY, the smallest year-over-year increase since mid-2021. From February to March, though, the average hourly pay did rise 0.3% after increasing 0.2% the month before.
 

March jobs report shows labor market and US economy are still going strong

Another month, another burst of strong job gains. Employers added 303,000 jobs in March. It was the 39th straight month of job growth and a much larger gain than forecast. On aggregate, the labor market remains healthy and has yet to show any meaningful signs of cooling. Over the past three months, job gains have averaged 276,000 – slightly stronger than the 251,000 averaged in 2023. Through the first quarter, the US economy added an impressive 829,000 new jobs – nearly a 200,000 more than in the fourth quarter of last year.

The continued strength in hiring suggests less urgency for policymakers at the Federal Reserve to lower the target range of the fed funds rate. Recent comments from FOMC members have homed in on the jobs market's underlying momentum as justification to wait and allow for more inflation data. Overall, the messaged was consistent: policymakers are in no rush to cut rates. With the labor market still strong and the economy humming, the FOMC can afford to be patient and wait for clearer signs that inflation is on a sustainable path back to 2% before dialling back the policy rate. Before the payroll report, markets had priced in a roughly 60% chance of the FOMC cutting its target range by 25 bps in June. That probability is sitting closer to 51% at the time of this writing and bets are now more evenly split between June and July (with 49% probability of rate cut).

The spotlight will fall on CPI inflation data and the minutes of the latest Fed meeting, both on Wednesday. These will help investors decide whether the Fed will cut rates in June. With US markets continuing to live and breathe monetary policy guidance, the minutes from the March FOMC meeting will be scrutinised for insights despite more recent comments from Fed officials. If nothing else, policymakers are data dependent, hence the additional focus on the upcoming US CPI data.

The March consumer price data demand increased attention after consumer inflation surprised to the upside at the start of the year. At a high level, we expect the bumpy and stubbornly slow retreat in inflation was on full display in March. Forecasts suggest inflation reaccelerated, with the CPI rate seen at 3.4% in March from 3.2% previously. However, the core rate is anticipated to tick down to 3.7%. The difference most likely reflects the rally in oil during the month, as the core figure excludes the effects of energy prices. This would translate into a mixed report for the Fed. A decline in the core rate would suggest the broader trend of disinflation continues, even if rising energy prices are keeping headline inflation elevated.

Any upward surprise in the upcoming CPI release could fully push market expectations of the first rate cut to July.

Source: BIMB Securities Research - 8 Apr 2024

• Foreign holdings of MYR debts securities increased to RM265.8bn
   
• Foreigners bought RM0.8bn of MGS and RM1.4bn of GII

• Foreign investors sold RM2.9bn in equity market

• Total portfolio outflows of RM1.2bn for equities and debt securities combined

• Demand for bonds has been strong whilst stable BNM outlook could lend supports to Malaysia government bonds

Foreign inflows made a comeback in March as foreign investors turned net buyers of Malaysia’s debt securities (Mar: +RM1.7bn; Feb: -RM1.2bn) for the first time in three months, mainly driven by a inflows of Government Investment Issues (GII) and Malaysian Government Securities (MGS). As a result, the total foreign debt holdings increased to RM265.8bn in March (Feb: RM264.1bn), bringing its share of the total outstanding debt to 13.0%.

Looking into details, foreign investors bought MGS by +RM0.8bn (Feb: +RM0.5bn; Jan: -RM1.8bn) while GII recorded a bigger inflow of RM1.4bn (Feb: -RM2.2bn; Jan: - RM0.7bn). With that, foreign holdings of government bonds (MGS+GII) increased by RM2.2bn to RM251.7bn or 21.7% of total bonds outstanding (Feb: -RM1.7bn to RM249.5bn or 21.7%). Individually, foreign investors held RM202.4bn of MGS, or 33.2% of total MGS outstanding and RM49.3bn of GII or 8.9% of total GII outstanding as of end-March. Meanwhile, foreigners bought MITB by -RM0.1bn but sold Private Debt Securities (PDS) including Private Sukuk by RM0.2bn.

As at end-March 2024, foreign investors bought RM1.7bn of Malaysian bonds (Feb: - RM1.2bn; Jan: -RM5.1bn). Meanwhile, foreign investors turned net sellers on Bursa Malaysia after four straight months of inflow with investors selling RM2.9bn of equity in March (Feb: +RM1.3bn; Jan: +RM0.7bn). As a result, Malaysia recorded overall foreign portfolio outflow of RM1.2bn in March 2024 (Feb: +0.1bn; Jan: -RM4.3bn). Cumulatively, YTD, foreign portfolio outflows amounted to RM5.5bn (3M23: +RM9.6bn), purely lifted by outflows from debt securities (3M24: -RM4.6bn, 3M23: +RM11.4bn). Foreign selling of Malaysian equities accumulated to RM0.9bn in 3M24 (3M23: -RM1.8bn).

Bank Negara Malaysia’s international reserves declined by USD0.5bn or -0.4% MoM to RM113.8bn as of end-March 2024. The decline was mainly attributed to a slight reduction in foreign currency reserves (- USD0.5bn to USD101.3bn) which declined for second consecutive months. In ringgit terms however, the value of BNM reserves increased by RM14.6bn to RM539bn. The current reserve is sufficient to finance 5.6 months of imports of goods and services and is 1.0 time total short-term external debt.
 

The US Treasury (UST) yields inched marginally lower in the range of 3bps and 8bps as investors reassessed future interest rate path after dovish note by the Fed. A bout of dovish guidance from major central bankers including those of the Fed itself, the ECB and BOE, continued to reaffirm expectations that policy easing will be kicking off soon during the summer months. The third estimate of 4Q23 GDP for the US came in at 3.4%, up from 3.2% in the second estimate and 3.3% in the advance estimate, aided by an upward revision to consumer spending. Meanwhile, the Fed’s preferred inflation measure, PCE deflator and core PCE deflator rose 2.4% and 2.8% YoY, respectively. Separately, Fed Chair Powell said that PCE deflator was within the Fed’s expectation and would only be appropriate to cut rates when inflation is in check. The benchmark 2Y UST yield fell to 4.62% while the benchmark 10Y UST saw its yield decline to 4.20%. Meanwhile, German Bunds posted modest gains in Europe as sentiment was aided by expectations of ECB rate cuts by the middle of the year. Regional bonds performed mixed with IndoGB 10Y yield shifted up and closed at 6.69%. Similarly, Singapore 10Y yield settled higher at 3.11% while ThaiGBs saw its 10Y yield closed lower at 2.5%.
 

Malaysian Government Securities (MGS) yields mostly ended little changed with the exception of 5Y MGS, which saw its yield rising 4bps. On the other hand, Government Investment Issues (GII) yields mostly ended stronger, with yields edging lower between 1bp and 3bps. Meanwhile, 10Y MGS and 5Y GII yields plateaued at 3.86% and 3.61%, respectively.

Throughout March 2024, there were three sovereign papers auctioned with a total of RM15.0bn issuance.

I. 10-yr Reopening of MGS 11/33, RM5.0bn

II. 30-yr New Issue of MGII (Mat on 03/54), RM5.0bn (RM3.0bn auction + RM2.0bn private

placement)

III. 5-yr Reopening of MGS 08/29, RM5.0bn

Outlook

Developed-market sovereign yields generally repriced higher in 1Q24 led by the UST. The MGS curve stayed resilient in 1Q24 despite weaker Ringgit and some selloffs in UST. ASEAN bond yields largely traded on lower vs. UST, especially for Malaysia where domestic supply and demand profiles are supportive. Gross MGS+GII supply totaled RM50bn in 1Q24 and we foresee that government bond issuance to be lower between RM175.0bn to RM180.0bn in 2024 (2023: RM185.9 billion). Foreign funds had been net sellers of Malaysia’s bond with outflows continued for three consecutive months in Dec-Feb but turned positive in March. We are mildly positive on the overall foreign flow this year, assuming Fed easing in 2H24 on the basis of US soft-landing – because a US hard-landing could affect foreign flows differently. With BNM unlikely to change its monetary policy stance anytime soon, local bonds lack catalyst. Yields traded in a tight 10-15bps range in the past 3 months, and may extend into a large part of 2Q24. Weaker Ringgit had not had much impact on bonds. Anticipation that BNM will hold the OPR at 3.00% throughout this year while the Fed is planning to cut could be helpful to lessen the rate differential advantage of the US over Malaysia. With domestic CPI continuing to be rather tame, and no clear developments yet as to the timing of the planned removal of petrol subsidies, local govvies should continue to remain supported. Still, we will watch for inflation trajectory, which will likely rise further in the next 3-9 months due to already implemented measures (e.g. higher water tariff, services tax) and planned restructuring in fuel subsidies to a targeted mechanism. But the cost-pushed nature of inflation is unlikely to cause rate hike, and less likely for local bonds to reprice significantly, although a moderate upward repricing in yields is still possible, depending on the pace of adjustments. The next BNM MPC decision on 9th May is expected to be a non-event.

Source: BIMB Securities Research - 8 Apr 2024

• Despite oil price was weak in 1Q24 at the range of USD75-85/bbl, the physical oil market was indeed in a tight market condition. IEA reported that OECD oil inventories stood at 2,758mn bbls in Jan24 which is c.70mn bbls lower than Jan23 level.

• IEA has revised upwards its oil demand growth by 110k bpd to 103.2mn bpd owing to higher bunker fuel demand due to Red Sea crisis. On the other hand, it cut its oil supply estimate by 920k bpd to 102.9mn bpd with the expectation of roll-over in OPEC+ production cut until end of year.

• Consequentially, oil market could be in deficit of 300k bpd in 2024 which will cause further drawdown of inventories. If this is materialize, we think Brent could rise further to USD95-105/bbl in near term. Nonetheless, we keep our Brent forecast of USD85/bbl unchanged at this juncture.

• Against this backdrop, we advise investors to take position in companies that has direct exposure to oil prices such as Hibiscus (TP: RM3.40) and DNeX (TP: RM0.58).

• Maintain an OVERWEIGHT recommendation on Oil and Gas sector. Our top pick are MISC (TP: RM10.10), MMHE (TP: RM0.94), Velesto (TP: RM0.34) and Hibiscus (TP: RM3.40).

Oil Market is Getting Tighter

Brent oil price recently rose to USD90/bbl after it was trading in the range of USD75-85/bbl in 1Q24. We think this is driven by a tight physical market condition. The International Energy Agency (IEA) had reported that OECD oil inventories stood at 2,758mn bbls in Jan24 which is c.70mn bbls lower than Jan23 level as well as below historical average of 2,900mn bbls.

In its Monthly Oil Market Report published in March 2024, the IEA has raised its 2024 oil demand forecast by 110k bpd to 1.3mn bpd mainly to account for stronger bunker fuel demand following change in trade flows and longer shipping route amidst Red Sea crisis. Hence, demand is expected to average at 103.2mn bpd.

Meanwhile on the supply side, the agency trimmed its forecast by 920k bpd to 102.9mn bpd as it expects OPEC+ production cut to be extended until end of 2024 (from current June 2024 deadline). Effectively, this will result in a deficit market (demand exceeds supply) of c.300k bpd throughout of the year.

No Change to Brent Oil Average Price Forecast

Owing to the deficit in oil market, we expect further drawdown in oil inventories which will keep oil price to remain elevated for remaining of 2024. Taking cues from IEA’s forecast, we think Brent could potentially rise to USD95-105/bbl soon. However, at this juncture, we keep our Brent forecast for 2024 unchanged at USD85/bbl. Note that Brent was traded at an average price of USD82.3/bbl in YTD24 which is similar to same period last year (YTD23: USD82.3/bbl).

Maintain OVERWEIGHT on Oil and Gas sector

Against this backdrop, we advise investors to take position in companies that has direct exposure to oil prices such as Hibiscus (TP; RM3.40) and DNeX (TP: RM0.58). We also maintain our OVERWEIGHT stance on the Oil and Gas sector. Our top pick remains as the following: MISC (TP: RM10.10), Hibiscus (TP: RM3.40), MMHE (TP: RM0.94), and Velesto Energy (TP: RM0.34).

Source: BIMB Securities Research - 8 Apr 2024