global and asean economic outlook: navigating …...global and asean economic outlook: navigating...

Global and ASEAN Economic Outlook: Navigating the Shifting Economic Landscape Benjamin Shatil

Regional ASEAN Economist Asia Economic Research J.P. Morgan

Global, EM Asia, and Malaysia: Economic Outlook April 2017

See end pages for analyst certification and important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making their investment decision.

Asia Economic and Markets Research

Ben ShatilAC

+65 6882-2311 [email protected] JPMorgan Chase Bank, N.A., Singapore Branch

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H

Reflation: Disinflationary shocks are fading: real growth and inflation on the rise Acceleration in nominal growth is rotating income back toward corporates; profits should rise 10%

Manufacturing is bouncing. Following two years of less than 1.5% growth, output should rise in 1H17. Firming goods demand a key catalyst, levered by a turn in the inventory cycle. Asia a key beneficiary.

US election expected to have small 2017 growth impact. Broad policy changes expected, but fiscal stimulus likely small. Impact of regulatory, health care, trade, and tax reform could be large over time.

A tale of two tails. There are signs of rising “animal spirits” in the DM. US policy a two-sided wild card. On balance, risks to growth and inflation forecasts are skewed to the upside for 1H17

Fed tightens as activity rebounds and labor markets hit full employment. US potential growth is below 1.5%; labor markets should tighten further Bias is for a more hawkish and less conventional FOMC as almost all of the FRB is expected to change by mid-2018.

Recent rise in growth from inventories and tech could be accompanied by 1Q17 slowdown China to slow a touch to 6.6% in 1Q17 as infrastructure and real estate offset deceleration elsewhere India’s demonetization shock mitigated by agriculture and government spending Elsewhere monetary easing pushed back as US policy shift suggests volatility in capital flows

Threat of China labeled as currency manipulator, Border Tax adjustment and uncertainty over One China policy are EM Asia’s biggest risks

Global outlook: Reflation and upside risks

1


US risks: Sequencing matters

Currency manipulator label. US treasury has 3 criteria for “currency manipulation.” These include a significant bilateral trade surplus with the U.S., a material current account surplus, and engaging in persistent one-sided intervention in the foreign exchange market. If a country is labelled as such, then the US could impose tariffs on imports from that country.

Border tax adjustment. Sales outside of the US would not be subject to taxation in the US (with international companies and

exporters being the largest relative winners), while companies that sell imported goods in the US would not be able to deduct their imported COGS from sales. Put another way, companies that sell imported products would be taxed on the full sale amount of such a transaction, rather than on the profit. In some cases, the taxes due would exceed the company’s existing profit. This could risk sparking retaliatory tariffs from other trading partners, leading to a slowdown in global trade, similar to the aftermath of Smoot Hawley act in 1930

The Homeland Investment Act 2. Provides American multinationals (MNCs) with a temporary tax relief on any additional

dividends repatriated to, and consequently invested in, the United States. This could have a potentially disruptive impact on US$ liquidity in EM Asia’s banks amid elevated LD ratios.

2


US risks: A menu of options

3


Agenda

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H 4

Global outlook

4

EM Asia outlook 20

Malaysia outlook 40

J.P. Morgan forecasts 46

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H G L

O B

A L

O

U T

L O

O K

Forecasting stronger growth and inflation

0

1

2

3

4

5

97 02 07 12 17

%oya (LCY)

GDP deflator, Global

Source: J.P. Morgan

Average 1997-2016

1.5

2.0

2.5

3.0

3.5

4.0

4.5

97 99 01 03 05 07 09 11 13 15 17

Global real GDP%oya

Potential growth

Source: J.P. Morgan

5


O B

A L

O

U T

L O

O K

Looking for more balanced growth

0

2

4

6

0

1

2

3

2012 2013 2014 2015 2016 2017Source: J.P. Morgan

%oya; both scales

Real consumption and fixed investment, DM

Investment

Real consumption

-3.0

-1.5

0.0

1.5

3.0

00 03 06 09 12 15 18

%oya

Real GDP deviation from potential

Source: J.P. Morgan

Emerging

Developed 0

1

2

3

4

2012 2013 2014 2015 2016 2017

%q/q, saar; both scales

Global real GDP and manufacturing

Source: J.P. Morgan

Real GDP

Mfg output

6


O B

A L

O

U T

L O

O K

Inflation takes a step higher, but reflation is nuanced in EM

7


O B

A L

O

U T

L O

O K

Reflation lifts profits and business spending

-40

-20

0

20

40

60

2

3

4

5

6

7

8

9

98 01 04 07 10 13 16

%oya; both scales; 1Q17 profits is an estimate

Global nominal GDP and corporate profits

Source: J.P. Morgan; MSCI earnings

Profits

Nominal GDP

-10

-5

0

5

10

15

-16

-8

0

8

16

01 03 05 07 09 11 13 15 17

%3m/12m

Global corporate profits and capex%3m/3m, saar

Source: J.P. Morgan/ Data through Feb 2017 estimate

Capex proxy

Profits

8


O B

A L

O

U T

L O

O K

0

1

2

3

4

5

11 12 13 14 15 16 17

%q/q, saar

Global IP and GDP

Source: J.P. Morgan

IP

GDP

-2

0

2

4

6

8

2014 2015 2016 2017

%3m/3m, saar

Manufacturing output

Source: J.P. Morgan

US

EMEuro area

Global manufacturing tide appears to lift all boats…

9


O B

A L

O

U T

L O

O K

…but the tea leaves may be saying something else

-50

-25

0

25

50

75

100

10 12 14 16 18

%3m/3m, saar, US$ terms

EM Asia exports by product

Source: J.P. Morgan

Mfg

Total

Commodities

-40

0

40

80

120

160

48

50

52

54

56

58

10 12 14 16 18

Index, sa

EM manufacturing PMI and copper prices


Source: J.P. Morgan

Copper priceEM PMI

10


O B

A L

O

U T

L O

O K

Hint of lifting in “animal spirits” in DM

-3

-2

-1

0

1

2

3

2011 2013 2015 2017

Std dev from 2010-16 average

Euro area confidence measures

Source: J.P. Morgan

Business Consumer

-15

0

15

30

5

10

15

20

25

30

2011 2012 2013 2014 2015 2016 2017Source: J.P. Morgan

Index

US capex intentions & real capex%q/q, saar

Fed surveys - capex intentions

Capex

-2

-1

0

1

2

2012 2013 2014 2015 2016 2017

Standard deviation from 2010-16 average

Global consumer confidence

Source: J.P. Morgan

DM

EM

-2.0

-1.0

0.0

1.0

2.0

2012 2013 2014 2015 2016 2017

Std. dev from 2010-16 average

Global business confidence

Source: J.P. Morgan

EM

G-4

11


O B

A L

O

U T

L O

O K

Macro outweighs politics in Europe

-40

-30

-20

-10

0

10

85 90 95 00 05 10 15

% bal, sa

Euro area major purchases at present

Sour ce: EC

-2

-1

0

1

2

07 09 11 13 15 17

%q/q, sa, includes J.P. Morgan forecast for income

UK real labor income and consumption

Consumption

Real laborincome

Source: ONS, J.P. Morgan

-2

0

2

2010 2011 2012 2013 2014 2015 2016 2017

%q/q saar

Tracking Euro area GDP growth with the PMI

Source: Markit, Eurostat, J.P. Morgan estimates

Actual GDP(1Q17 fcst)

PMI-based tracker

-4

-2

0

2

4

2010 2012 2014 2016

%oya, adj. for loan sales/securitizations

Euro area bank lending to real economy

Source: J.P. Morgan

Non-financial corporates

Households

12


O B

A L

O

U T

L O

O K

• We expect broad policy change, but fade the extremes:

• Net fiscal stimulus to add 0.2%-pt to growth in 2017 and 2018

• No disruptive trade conflicts

• Impact of tax reform, regulatory reset, ACA replace, and infrastructure could be significant but won’t be felt for some time.

• Border adjustment is necessary to get corporate tax reform. It should put upward pressure on the dollar

• We hold these views lightly. Possible US policy surprises are a wild card

US election has a small growth impact

-12

-9

-6

-3

0

3

60 65 70 75 80 85 90 95 00 05 10 15Source: U.S. Treasury, OECD, J.P. Morgan

% of GDP

US fiscal deficit, federal

Forecast

Impact of Trump fiscal plan: JPM Forecast

Personal Corporate

Trump plan ($Bn) 250 250 500% of GDP 1.3 1.3 2.6

JPM AssumptionImplemented ($Bn) 100 100 150% of GDP 0.5 0.5 0.8Multiplier 0.6 0.4 1.0

GDP impact (%GDP)Year 1: 2H17-1H18 0.2 0.1 0.0Year 2: 2H18-1H19 0.1 0.1 0.2%pt, 4Q/4Q

2017 0.1 0.1 0.02018 0.2 0.1 0.0Cumulative 0.2 0.2 0.8

Source: J.P. Morgan

Tax cuts, per year Spending

(over 5 yrs)

13


O B

A L

O

U T

L O

O K

US regulatory reset and tax reforms upside risk

40

50

60

70

80

90

100

05 07 09 11 13 15 17

Percentile rank relative to rest of world and OECD

US ease of starting a new business

Source: World Bank Group, J.P. Morgan Asset Management

US vs. World

US vs. OECD

Harder

Easier

0

5

10

15

20

25

30

35

07 09 11 13 15 17

percent, sa

NFIB survey: biggest concern

Source: NFIB, J.P. Morgan

Regulation

Quality of Labor

Poor sales

Taxes

14


O B

A L

O

U T

L O

O K

US core inflation is drifting higher and that’s good

0.5

1.0

1.5

2.0

2.5

3.0

06 09 12 15

%oya

US measures of core inflation

Source: J.P. Morgan

Core PCE price index

Core CPI

-2

-1

0

1

2

3

-5.0

-2.5

0.0

2.5

5.0

7.5

2010 2011 2012 2013 2014 2015 2016 2017

% change 6mos, saar, both scales

US import prices and core goods CPI

Non-fuel imports (3 mos ahead)

Core goods CPI

Source: BLS

0

1

2

3

4

5

00 02 04 06 08 10 12 14 16

%ch over 12 months

US healthcare inflation

Source: J.P. Morgan

Healthcare

Healthcare

-1

0

1

2

3

4

56

7

8

9

10

11

1290 95 00 05 10 15

Percent

Rental vacancy rates and PCE tenants rent%oya

Source: J.P. Morgan

Rental vacancies(inverted)

PCE- tenants rent

15


O B

A L

O

U T

L O

O K

Fed 2017 outlook: A return to the observables

Observables: Fed Forecasts, Mar 20172017 2018 2019 LR

Real GDP 2.1 2.1 1.9 1.8…as of Dec 2015 2.2 2.0 2.0

Unemp rate 4.5 4.5 4.5 4.7…as of Dec 2015 4.7 4.7 4.9

PCE inflation 1.9 2.0 2.0 2.0…as of Dec 2015 1.9 2.0 2.0

PCE core inflation 1.8 2.0 2.0 ……as of Dec 2015 1.9 2.0 …

Fed funds 1.4 2.1 3.0 3.0…as of Dec 2015 2.4 3.3 3.5

Note: Forecast are medians of FOMC participants; Source: FRB

-0.8

-0.4

0.0

0.4

0.8

2012 2013 2014 2015 2016 2017

Data (observables)

Structure

Residual

Source: Federal Reserve Board, J.P. Morgan

Contribution from:

Hawkish

Dovish

%-pts:

Average change in Fed "dot plot"

Unobservables: FOMC long-run projections

y* u* r*

Current, Mar '17 1.8 4.7 3.00

2016 1.8 4.8 3.00

2015 2.0 5.1 3.75

2014 2.2 5.4 3.75

2013 2.2 5.6 4.00

2012 2.4 5.6 4.25Source: Federal Reserve Board

16


O B

A L

O

U T

L O

O K

Fed turnover a major issue

• Two seats are open. One will likely be filled by Vice Chairman for Financial Stability

• Five or six board seats to turn over by mid-2018. This includes Fed Chair Yellen and Vice Chair Fischer

• A bias is toward a more hawkish Fed. But the big risk is a shift to unconventional and/or political leadership

0.3

0.5

0.8

1.0

1.3

1.5

Jan 13 Apr 13 Jul 13 Sep 13 Dec 13

Percent per annum

US 1mo OIS, year-end 2015

Source: J.P. Morgan

17


O B

A L

O

U T

L O

O K

US expansion has entered a mature phase

8

10

12

14

16

18

70 75 80 85 90 95 00 05 10 15

% of corporate value added

Source: BEA, FRB

US domestic corporate profit margin

-3

-2

-1

0

1

2

3

4

00 02 04 06 08 10 12 14 16

%chg over 8 quarters, saar

US ULC and nonfarm business price deflator

Source: J.P. Morgan

Nonfarm business price deflator

ULC

18


O B

A L

O

U T

L O

O K

US recession risk: Short-term is falling, but medium-term is elevated

0%

10%

20%

30%

40%

50%

60%

70%

Jan-16 Mar-16 Jun-16 Sep-16 Dec-16

Probability of recession within 12 months

Source: J.P. Morgan

Economic data,with

background risk

Baa spread + S&P 500

Economic data,near-term composite

0%

20%

40%

60%

80%

100%

55 60 65 70 75 80 85 90 95 00 05 10 15Source: J.P. Morgan

Probability of recession within 3 yearsfrom multivariate regression model

19


Agenda


EM Asia outlook

20

Global outlook 4

Malaysia outlook 40

JP Morgan forecasts 46

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H E M

A

S I

A

O U

T L

O O

K

1. Growth differentials are key - EM Asia lags lift elsewhere

-20

-10

0

10

200

2

4

6

8

02 05 08 11 14 17

%-pt

EM: growth differential and FX

%oya

Source: J.P. Morgan

USD FXEM-US GDP growth

-6

-3

0

3

6

9

12

02 05 08 11 14 17

%-pts

EM: growth differential

Source: J.P. Morgan

EMEA less USLatAm less US

EM Asia less US

21


A

S I

A

O U

T L

O O

K

EM Asia could see some payback after 1Q17 lift

-8

-6

-4

-2

0

2

4

6

8

10

3

4

5

6

7

8

9

07 09 11 13 15 17

% of GDP, 2qma

EM Asia-US growth/int. rate diff. & K flows

%-pt.

Source: National sources, J.P. Morgan estimates

EM Asia less US growth and policy

rate diff.

Capital flows

1Q17 estimates

-8

-4

0

4

8

-300

-200

-100

0

100

200

07 09 11 13 15 17

US$bn, 2qma

EM Asia K flows and FX%oya

Source: J.P. Morgan

Capital flowsUSD FX

-300

-200

-100

0

100

200

07 09 11 13 15 17

US$bn, 2qma

EM Asia BoP flows

Source: J.P. Morgan

Current acc.flows

Overall

Capital flows

22


A

S I

A

O U

T L

O O

K

2. Limited impact from tightening in financial conditions

2.75

3.25

3.75

4.25

4.75

1.25

1.75

2.25

2.75

3.25

13 15 17

%p.a., eop, both scales10-yr UST and 10-yr EM Asia bond yields

Source: Bloomberg, J.P. Morgan

US

EM Asia ex. CN/IN

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.195

100

105

110

115

120

125

1302013 2014 2015 2016 2017

Index, inverse scale

ADXY and 1-yr UST

%p.a.

Source: J.P. Morgan

1-yr UST

ADXY

50

52

54

56

1.5

2.0

2.5

3.0

2013 2014 2015 2016 2017

%p.a., eop

DM manufacturing PMI and US 10-yr USTIndex, sa

Source: J.P. Morgan

10-yr US treasuryPMI

23


A

S I

A

O U

T L

O O

K

FX, not policy rates, to flex given balance sheet structure

0

50

100

150

02 04 06 08 10 12 14 16

% GDP

EM Asia credit by currency denomination

Source: BIS, national sources and J.P. Morgan

EM Asia ex CN external debt

China external debt

EM Asia ex CN LC bank credit

China local currencybank credit

100

105

110

115

120

4.0

4.5

5.0

5.5

6.0

2013 2014 2015 2016 2017 2018

%p.a.

EM Asia policy rate and ADXY

Index, inverse scale

Source: National sources and Bloomberg

ADXY

Policy rate

24


A

S I

A

O U

T L

O O

K

3. Growth support from cyclical lift, cresting in late 1Q17

47

48

49

50

51

52

53

-30

-15

0

15

30

2013 2014 2015 2016 2017 2018


EM Asia-41 manufacturing PMI and exportsDI, sa

Source: Markit, SIPMM, national sources, J.P. Morgan; 1. CN, KR, SG, TW

PMI, export-weighted

Exports

-50

-25

0

25

50

2013 2014 2015 2016 2017 2018


EM Asia exports

Source: National sources, J.P. Morgan

CN, KR, SG, TWKR, TW, SG

-75-50-250255075100125

474849505152535455

2013 2014 2015 2016 2017 2018

IndexEM Asia PMI and copper prices


Source: NBS and Bloomberg

PMI Copper

-45

-30

-15

0

15

30

45

2013 2014 2015 2016 2017 2018

%3m/3m, saar, US$ termsEM Asia1 exports by product

Source: National sources, J.P. Morgan; 1. CN, KR, SG, TW

Manufactureds

Total

Commodities

25


A

S I

A

O U

T L

O O

K

With capex lift led mainly by North Asia

-10

-5

0

5

10

15

20

2013 2014 2015 2016 2017

%2q, saar

EM Asia ex. CN/IN non-const. fixed inv.

Source: National sources

ASEAN

Taiwan

Korea

-20

-10

0

10

20

2013 2014 2015 2016 2017

%2q, saar

ASEAN non-construction fixed investment

Source: BPS, DOS, NESDB, Malaysia seasonally adjusted via X-12

MY

SG

ID

TH

-10

0

10

20

06 08 10 12 14 16

%2q, saar

EM Asia ex CN/IN fixed investment


Overall

Construction

Non-construction

26


A

S I

A

O U

T L

O O

K

And help from a more stable China

-120

-90

-60

-30

0

30

2015 2016 2017

US$ billion, monthly changes

China gross FX reserves

Source: PBOC

49

50

51

52

53

7

14

21

28

2012 2013 2014 2015 2016 2017 2018

%oya, YTD

China PMI and fixed asset investment

Source: NBS

PMIFAI

Index, sa

0

10

20

30

12 14 16 18

%oya, YTD

China fixed asset investment

Source: NBS

Total

Private

Public

27


A

S I

A

O U

T L

O O

K

4. China’s credit boom has had limited impact until 2016

100

150

200

250

6

8

10

12

14

16

02 04 06 08 10 12 14 16 18

%oya

China credit growth and GDP

% of GDP

Source: NBS and PBOC

Real GDP TSF

-10

-5

0

5

10

15

20

25

6

8

10

12

14

16

02 04 06 08 10 12 14 16 18

%oya

China real GDP and credit impulse

%pt. of GDP, oya


GDP

Credit impulse

28


A

S I

A

O U

T L

O O

K

Growth stabilizes; first upward GDP revision in a while

-60

-10

40

90

48

50

52

54

56

10 12 14 16 18

Index

China NBS PMI and copper prices


Source: NBS and Bloomberg

PMI Copper

72

77

82

87

92

10 12 14 16 18

Index, Jan 2002 =100

EM Asia/China GDP f'cast revision index

Source: J.P. Morgan

EM Asia

China

29


A

S I

A

O U

T L

O O

K

Rebalancing “lightens” China GDP

0

2

4

6

8

10

12

02 04 06 08 10 12 14 16

%pt. contribution to headline GDP growth

China composition of GDP growth

Source: NBS

Industry

Services

-5

0

5

10

02 04 06 08 10 12 14

%oya

China employment by sector

Source: MHRSS

Industry

Services

-4

-2

0

2

4

02 04 06 08 10 12 14 16

% deviation from HP-filtered trend

China output gap by sector

Source: NBS and J.P. Morgan

Manufacturing

Services

38

40

42

44

46

48

50

06 08 10 12 14 16

% share of total GDP, 4qma

China: GDP composition

Secondary industry

Tertiary industry

Source: NBS

30


A

S I

A

O U

T L

O O

K

Helped by FX administration and liquidity operations

-4

-2

0

2

4

6

06 08 10 12 14 16 18

RMB trillion, change from year ago

China: sources of monetary base

Source: PBOC

Base money

NFA

NDA

PBOC regains control

-750

-500

-250

0

250

500

06 08 10 12 14 16 18

US$ billion, 6-month cumulative

China trade flows and FX reserves


FX reserves less trade flows

FX reserves

Trade

31


A

S I

A

O U

T L

O O

K

Better coordination between fiscal and monetary policy

-2

0

2

4

6

07 09 11 13 15 17

RMB trillion, change from year agoChina PBOC NDA and claims on commercial banks

Source: PBOC

PBOC NDA

PBOC claims oncommercial banks

-2

0

2

4

6

8

07 09 11 13 15 17

RMB trillion, change from year agoChina bank claims on govt. and PBOC claims on banks

Source: PBOC

PBOC claims on banks

Bank claims on government

7

14

21

28

-2

0

2

4

6

12 14 16 18

RMB trillion, change from year agoChina: PBOC NDA and public FAI

%oya, ytd

Source: PBOC and NBS

PBOC, NDA

PublicFAI

0

10

20

30

40

50

60

07 09 11 13 15 17

%oya, ytdChina: FAI by sector

Source: NBS

Public

Private

32


A

S I

A

O U

T L

O O

K

Focus shifts to financial stability; mindful of funding risks

84

88

92

96

100

104

108

2.5

3.5

4.5

5.5

6.5

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17

%p.a.

China: 3-month SHIBOR and NEER

Index, Dec 31 2014 =100

Source: Bloomberg

CFETS NEER

3-mo SHIBOR

1.5

2.0

2.5

3.0

3.5

4.0

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17

% p.a

China: market-based interest rates

Source: Bloomberg, J.P. Morgan

7-day SLF

7-day repo

3M SHIBOR

7-day reverse repo

33


A

S I

A

O U

T L

O O

K

5. Where has EM Asia’s growth gone?

5.5

6.0

6.5

7.0

7.5

8.0

8.5

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2013 2014 2015 2016 2017

%q/q saar, both scales

EM Asia: quarterly GDP growth

Source: National sources and J.P. Morgan

EM Asia ex. CN/IN

China

5

6

7

8

9

10

11

02 05 08 11 14 17

%oya

EM Asia: annual GDP growth

Source: National sources and J.P. Morgan forecasts

Avg growth

34


A

S I

A

O U

T L

O O

K

Weak export growth has been the critical factor

5

6

7

8

9

10

-10

-5

0

5

10

15

20

25

30

02 04 06 08 10 12 14 16

Global trade (US$)

%q/q saar 8-qtr mma, both scales

EM Asia: GDP and global trade

EM Asia GDP

Source: CEIC and J.P. Morgan

-10

0

10

20

60

90

120

150

02 04 06 08 10 12 14 16

Index, 2005=100, real terms sa

World merchandise trade

Source: CPB world trade monitor, J.P. Morgan

Change

Level

Avg. 2004-2007

Avg. 2012-2016

35


A

S I

A

O U

T L

O O

K

Export slowdown the biggest driver of slower growth

Source for all charts: J.P. Morgan

-15

0

15

30

-7

0

7

14

02 04 06 08 10 12 14 16

%q/q, saar, 4qma, real terms

EM Asia ex CN fixed investment and exports

Fixed investment

Exports, NIPA basis

-0.1

0

0.1

0.2

0.3

0.4

0.5

1Q00-4Q10 1Q11-1Q15

%-pts, response of EM Asia gth to 1%-pt change in DM gth

EM Asia: dependence on DM growth

-10

0

10

20

0

2

4

6

8

02 04 06 08 10 12 14 16

%oya, both scales

EM Asia ex CN/IN: domestic demand and exports

Real GDP

Domestic demand,net of inventories Real exports

-30-20-10

010203040

02 04 06 08 10 12 14 16

%oya, 3mma, US$ nominal terms

EM Asia exports


Excluding EM Asia

To all destinations

36


A

S I

A

O U

T L

O O

K

US has been doing bulk of heavy lifting in G-3

0

4

8

12

16

20

2004-2007 2011-2014

ex. G3

G3

%pt contribution to average headline %oya growth

Contribution to EM Asia extra-regional export growth


0

2

4

6

8

10

12

14

2004-2007 2011-2014

US

EU

JP

%pt contribution to average headline %oya growth

G-3 Contribution to EM Asia extra-regional export growth


37


A

S I

A

O U

T L

O O

K

US potential growth less than 1.5%; productivity drags

0

1

2

3

0

1

2

3

4

5

60 65 70 75 80 85 90 95 00 05 10 15

%chg over 20qtrs, saar

Sour ce: BLS, Census Bur eau

US growth in productivity and working age population

% year-over-year

Working age population

Nonfarm productivity

0.5

1.0

1.5

2.0

1.5

2.0

2.5

3.0

85 90 95 00 05 10 15

Percent; both scales

Tech investment as a share of GDP

Source: J.P. Morgan

R&D

IT equipment

Software

25

35

45

55

14

16

18

20

22

24

26

60 65 70 75 80 85 90 95 00 05 10 15

% of population aged 16-24

College enrollment and share of workforce aged 45-54

Source: J.P. Morgan, Census

%

Workforce aged 45-54

College enrollment (age 16-24)

38


A

S I

A

O U

T L

O O

K

Rise in leverage holding back growth on the margin

5

10

15

20

25

30

HK SG CN TW TH KR ID PH

2010

1H16

% of GDP

EM Asia bank credit debt service cost


-0.10.00.10.20.30.40.50.60.70.80.9

ID SG TH CN IN HK KR MY TW PH

%-pt change, Latest less 2014

EM Asia bank non-performing loans

Source: national sources, latest is 1H16 for all except IN where latest is 2015

39


Agenda


Malaysia outlook

40

Global outlook 4

EM Asia outlook 20

JP Morgan forecasts 46

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H M A

L A

Y S

I A

O

U T

L O

O K

2017 GDP growth supported by investment, external demand looks to be turning up

Changes in FX regulations – 75% export conversion – is potentially positive . Regulation mandates that all onshore settlements to be in MYR from April 1 onwards – Indonesia’s experience with similar regulation provides useful benchmark. FX reserves and M2 will be key to watch

Inflation expected to rise in 2017 due to oil price adjustment and technical factors due to base effects– BNM expected to remain unchanged

Malaysia: macro view

Malaysia: economic indicatorsAverage 2010-14 2015 2016f 2017f

Real GDP, % change 5.8 5.0 4.2 4.3 Consumption¹ 4.3 3.7 3.3 3.4 Investment¹ 2.6 1.6 1.1 1.1 Net trade¹ -1.1 -0.4 -0.2 -0.2Consumer prices, %oya 2.4 2.1 2.1 4.0 % Dec/Dec 2.4 2.7 1.8 4.4Producer prices, %oya 2.9 -7.5 -1.1 2.0Government balance, % of GDP -4.2 -3.2 -3.1 -3.0Merchandise trade balance (US$ bn) 40.3 27.9 20.8 24.8 Exports 215.7 175.5 169.3 173.5 Imports 175.4 147.7 148.4 148.7Current account balance 21.2 8.7 4.1 9.0 % of GDP 6.9 2.9 1.4 2.9International reserves, (US$ bn) 126.2 103.0 103.0 107.01. Contribution to growth of GDP.Source: National sources, J.P. Morgan

41


L A

Y S

I A

O

U T

L O

O K

Malaysia: growth firming

-6

-3

0

3

6

9

12

-8

-4

0

4

8

01 03 05 07 09 11 13 15 17

%oya

Malaysia leading index and real GDP

Source: DOS

Leading index,advanced 3 months

Real GDP

%2q, saar

-5

0

5

10

10 11 12 13 14 15 16 17

%3m/3m, saar

Malaysia CPI

Source: DOS and J.P. Morgan forecasts

Core

Headline

42


L A

Y S

I A

O

U T

L O

O K

Delivering a lift to the nominal trade balance Exports firming , especially commodities

PCE also has moved up since 3Q16

Malaysia: cyclical momentum stabilizing

Capital goods demand has inflected

Table 1: Malaysia natural gas and crude palm oil exports2012 2013 2014 2015 2016 2017 1

Total (1+2) 36.6 34.0 34.1 22.8 18.6 22.9% GDP 11.6 10.5 10.1 7.7 5.9 7.61. LNG, US$bn. 19.8 20.5 20.7 12.1 8.3 11.6Volume, mn MT 23.8 24.9 25.1 24.8 25.3 27.0Price, US$/MT 834 824 825 489 332 4302. CPO, US$bn. 16.8 13.5 13.4 10.7 10.4 11.3Volume, mn MT 21.1 20.7 20.1 20.4 18.7 18.7Price, US$/MT 794 652 667 523 553 604Source: DOS; 1. Based on latest 3-mo. average volumes and latest prices

-15

0

15

30

-5

0

5

10

15

20

10 12 14 16

%3m/3m, saarMalaysia domestic credit billings and private consumption

%q/q, saar

Source: BNM and DOS

Credit card billings

PCE

-40

-20

0

20

40

60

1.5

1.7

1.9

2.1

2.3

10 11 12 13 14 15 16 17 18

US$bn, 3mma, saMalaysia: capital goods imports

%oya, 3mma

Source: DOS

ChangeLevel

9.5

10.0

10.5

11.0

11.5

12.0

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016 2017 2018

US$billion, 2mma, sa, both scalesMalaysia exports

Source: DOS

Manufactured goods

Commodities

43


L A

Y S

I A

O

U T

L O

O K

BNM’s US$ buy-sell operations understates FXR drawdown Domestic outflows modest despite foreign FI outflows

Creating incentive for local banks to even keel market

Malaysia: policy changes help stabilize FX…

But has helped stabilize domestic liquidity

-15

-10

-5

0

5

10

15

10 11 12 13 14 15 16 17 18

US$billion, 30mo. sum of monthly changesMalaysia capital flows

Source: BNM and DOS

Domestic flows

Foreign FI flows

-0.2

0.0

0.2

0.4

0.6

0.1

0.2

0.3

0.4

0.5

0.6

0.7

10 11 12 13 14 15 16 17 18

%p.a., eop, both scalesMalaysia 3-mo. merchant bank depo. rates and KLIBOR

subtitle

Source: BNM

3-mo. KLIBOR less OPR

3-mo. FD rate less OPR

-10

-5

0

5

10

15

20

90

100

110

120

130

140

150

10 11 12 13 14 15 16 17 18

US$ billion, both scalesMalaysia FX reserves

Source: BNM

FX forwards

FX reserves

70

100

130

160

230

260

290

320

10 11 12 13 14 15 16 17 18

MYR billion, both scalesMalaysia commercial bank non-loan assets

Source: BNM

Placements with BNM and other securities

Govt. bonds

44


L A

Y S

I A

O

U T

L O

O K

…leaving market on even keel

-40

-20

0

20

40

10 12 14 16 18

MYR billion, 3-mo. rolling sum of monthly changes

Malaysia government bond holdings

Source: BNM

Foreigners

Banks

45


Agenda


JP Morgan forecasts

46

Global outlook 4

EM Asia outlook 20

Malaysia outlook 40

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H J P

M

O R

G A

N

F O

R E

C A

S T

S

Regional economic outlook


2016 2017 2018 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

Real GDP, %-ch over 1 quarter, saarJapan 1.0 1.3 0.7 1.8 1.4 1.0 1.0 1.6 1.5 0.9 0.5Australia 2.5 2.8 3.2 3.1 -2.0 4.4 2.8 3.2 3.9 3.9 3.0New Zealand 3.2 3.0 2.7 2.7 4.3 1.7 2.7 3.1 4.3 3.4 1.6Emerging Asia 5.8 5.8 5.6 6.2 5.9 5.8 5.6 5.6 6.1 5.7 5.5

ex China and India 3.4 3.4 3.4 4.0 3.6 4.0 3.1 3.2 3.4 3.3 3.3China 6.7 6.6 6.2 7.1 6.8 6.7 6.6 6.3 6.8 6.3 6.0Hong Kong 1.9 2.6 2.4 5.7 3.2 4.9 1.4 1.4 1.8 1.8 2.0Taiwan 1.5 2.1 1.9 0.8 4.0 1.8 1.8 2.2 2.1 1.8 2.0Korea 2.7 2.4 2.5 3.2 2.5 1.6 2.7 2.5 2.8 2.5 2.3India 7.0 7.2 7.4 6.6 6.7 5.5 6.0 7.5 8.5 8.0 7.5Indonesia 5.0 5.1 5.3 6.4 6.3 5.4 4.7 5.0 5.0 5.0 5.5Malaysia 4.2 4.3 4.2 2.7 5.8 5.7 4.0 3.5 4.5 5.0 3.0Philippines 6.8 6.8 6.7 8.5 4.8 7.1 6.6 6.8 6.7 6.8 6.7Singapore 2.0 1.6 2.4 0.8 -0.4 12.3 -0.8 1.0 1.2 1.2 2.6Thailand 3.2 3.0 2.9 4.2 1.7 1.7 3.5 3.0 3.2 3.0 3.2

Consumer prices, %oya, averageJapan -0.1 0.7 0.9 -0.3 -0.5 0.3 0.4 0.8 1.1 0.6 0.7Australia 1.3 1.9 2.1 1.0 1.3 1.5 2.0 1.8 1.7 2.0 2.1New Zealand 0.5 1.7 2.1 0.4 0.2 1.1 1.3 1.5 2.0 2.0 2.1Emerging Asia 2.3 2.5 3.0 2.4 2.0 2.2 2.3 2.4 2.7 2.7 2.8

ex China and India 1.6 2.4 2.1 1.5 1.3 1.8 2.3 2.5 2.7 2.4 2.2China 2.0 2.2 2.9 2.1 1.7 2.2 2.0 2.1 2.4 2.4 2.6Hong Kong 2.4 2.0 2.2 2.6 3.1 1.2 1.1 2.0 1.5 3.6 3.2Taiwan 1.4 1.5 1.7 1.3 0.7 1.8 1.3 1.5 2.0 1.2 1.6Korea 1.0 1.9 1.6 0.8 0.7 1.5 2.0 2.0 2.2 1.5 1.3India 5.0 4.3 5.0 5.7 5.2 3.7 3.7 3.8 4.4 5.2 5.0Indonesia 3.5 3.9 3.2 3.5 3.0 3.3 3.4 4.1 4.2 4.0 3.7Malaysia 2.1 3.2 2.4 1.9 1.3 1.7 4.3 4.0 4.2 3.4 2.4Philippines 1.8 3.2 3.0 1.5 2.0 2.3 3.0 3.4 3.8 3.9 3.7Singapore -0.5 1.2 1.4 -0.9 -0.4 0.0 0.9 1.1 1.3 1.3 1.4Thailand 0.2 1.8 1.9 0.3 0.3 0.7 1.6 1.4 1.8 1.8 1.8

47

A S I A E C O N O M I C A N D M A R K E T S R E S E A R C H J P

M

O R

G A

N

F O

R E

C A

S T

S

Regional outlook: Policy rate and exchange rate forecasts


2016 2017 1Q16 2Q16 3Q16 4Q16 Current 1Q17 2Q17 3Q17 4Q17Official interest rates, % p.a., end-periodUnited States Federal funds rate 0.750 1.500 0.500 0.500 0.500 0.750 0.750 1.000 1.250 1.500 1.500Japan Overnight call rate -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10Australia Cash rate 1.50 1.00 2.00 1.75 1.50 1.50 1.50 1.50 1.50 1.25 1.00New Zealand Cash rate 1.75 1.75 2.25 2.25 2.00 1.75 1.75 1.75 1.75 1.75 1.75China 1-year working capital 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35Taiwan Official discount rate 1.38 1.38 1.50 1.38 1.38 1.38 1.38 1.38 1.38 1.38 1.38Korea Base rate 1.25 1.00 1.50 1.25 1.25 1.25 1.25 1.25 1.00 1.00 1.00India Repo rate 6.25 6.25 6.75 6.50 6.50 6.25 6.25 6.25 6.25 6.25 6.25Indonesia1 BI rate 4.75 4.75 6.75 6.50 5.00 4.75 4.75 4.75 4.75 4.75 4.75Malaysia Overnight policy rate 3.00 3.00 3.25 3.25 3.00 3.00 3.00 3.00 3.00 3.00 3.00Philippines2 Reverse repo rate 3.00 3.00 4.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00Thailand 1-day repo rate 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50Exchange rates, end-periodJapan USD/JPY 116.8 99.0 112.5 102.9 101.3 116.8 113.7 108.0 105.0 102.0 99.0Australia AUD/USD 0.72 0.68 0.77 0.74 0.77 0.72 0.77 0.73 0.71 0.69 0.68New Zealand NZD/USD 0.70 0.62 0.69 0.71 0.73 0.70 0.71 0.68 0.66 0.64 0.62China USD/CNY 6.9 7.10 6.45 6.65 6.67 6.94 6.88 7.05 7.20 7.15 7.10Hong Kong USD/HKD 7.75 7.75 7.76 7.76 7.76 7.75 7.76 7.79 7.81 7.76 7.75Taiwan USD/TWD 32.4 32.75 32.18 32.23 31.28 32.40 30.78 32.50 33.00 32.75 32.75Korea USD/KRW 1205.1 1210 1140 1155 1099 1205 1141 1230 1200 1180 1210India USD/INR 67.9 68.5 66.3 67.5 66.6 67.9 66.8 69.8 70.5 69.5 68.5Indonesia USD/IDR 13473 14000 13260 13213 13051 13473 13362 13800 14200 14100 14000Malaysia USD/MYR 4.49 4.45 3.90 4.03 4.14 4.49 4.45 4.50 4.60 4.50 4.45Philippines USD/PHP 49.61 50.50 45.93 47.13 48.30 49.61 50.32 51.00 51.50 51.00 50.50Singapore USD/SGD 1.45 1.45 1.35 1.35 1.36 1.45 1.41 1.47 1.48 1.46 1.45Thailand USD/THB 35.83 36.25 35.10 35.17 34.59 35.83 34.97 36.50 36.75 36.25 36.251. The BI rate for Indonesia reflects announced recalibration effective August 19, 2016. 2. The Philippines introduced a recalibrated reverse repo rate effective June 3 at a level of 3.00%.

48


Disclosures

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Disclosures or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised January 07, 2017.

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