Thursday, January 31, 2019

What's dangerous for 2019

The first month for 2019 is almost going to see its close. While very few of Malaysian companies have reported earnings, US companies are midway through their reporting. From my daily watching and reading, I would say it has been a mix bag. Seldom do I really follow through and be tied down to quarterly earnings. This time though, it has a sizeable threat.

CHINA! and semiconductors.

Several of the companies that are largely dependent on business from China is seeing deterioration. Companies like Nvidia, Intel, Apple, Caterpillar - they have reported earnings or guidance that seems to show that China is slowing down. All of them has indicated that their business has slowed in China. Whether this is wide spread i.e. over the entire China's economy or certain particular economy i.e. semiconductor, construction is unknown. One other factor is also because of the trade conflict between China and US, the Chinese are now being patriotic and they are preferring Chinese brands. This is seen from the market share growth of Huawei's phones as against Apple's IPhones.

However, the other two companies being Intel and Nvidia, despite the trade friction, if the demand is still there, the Chinese companies will still be buying as there are very little alternatives. Intel as we know is largely providing CPUs for PCs, servers and modem chips for Iphones. Nvidia is another chip company whose business supplies to the gamers, data centers, autonomous mobility market.

It is still hard to read how bad the Chinese economy is going to affect the world this year. There are already signals as provided by Alibaba's VP, Micheal Evans a month ago, where he indicated that volume growth has slowed. In China, many economists and businessman are already expecting slowing growth - but to how much? Will there be a recession. Official data from the Chinese government still shows growth of 6% to 7%. Is this true?

What is the impact to Malaysia

Malaysia is a huge trading partner to China especially when it comes to exporting semiconductor components to China, for them to assemble them into full product. Among the companies that exports to China via Malaysia are companies like Intel, Broadcom, Infineon. Malaysian listed companies such as Inari Amertron is a supplier to Broadcom especially for the RF filters. As we have seen, Inari has already been affected somewhat, but not massive.

What about the automation companies like Vitrox, Pentamaster? I presume as we see the trend affecting Intel and Nvidia, there is a possibility that China may see under utilisation of its capacity. With that, there are good chance that these Malaysian companies may see slower growth as well. With the threat of the trade war, many companies are also looking for alternative manufacturing sites. Vietnam, Malaysia, Indonesia, Thailand would definitely be explored. I do not see it to be immediate though as China is working on its under utilisation.

Palm Oil is in danger

The trade war also sees China offering to purchase a vast quantity of soy bean oil to make up for the trade imbalance. As it is, the details are still very vague but considering that if some agreements are to be materialised, soybean will be used as a trading commodity. What's good for soybean farmer in US will not be good for palm oil as they are substitutes. I am very wary of palm as China has not many traded goods to show to the American exporters to make up the imbalance besides cars, Boeing planes, beefs.

A slowing down China towards Malaysia

As it is, at the moment it will be hard to figure out the actual impact. I fear though that the initiatives by Malaysia government to reduce debt will not be able to materialise unless we start to sell national assets especially those held through Khazanah. The government is adamant on reducing debt. Hence, medium term i.e. for the next 3 - 5 years, we will see corporate exercise happening where these assets will be privatised.

1 comment:

felicity said...

At the end of two days of high-level talks next door to the White House, Liu told Trump China would make a new, immediate commitment to increase soybean purchases. An administration official later clarified the amount as a total of 5m tonnes, in effect doubling the amount bought by China since resuming limited purchases in December.