PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

17 May 2010

Leading Index Rebounded In March, Pointing To A

Resilient Economic Growth In 2H 2010

◆ The Leading Index, which provides an early signal of the direction that the economy is heading, rebounded to
increase by 3.7% mom in March, the first increase in four months and from -0.5% in February. This was
underpinned by a pick-up in the Bursa Malaysia Industrial index (+0.3%), trade with eight major trading partners
(+0.4%), industrial material price index (+0.7%), the ratio of price to unit labour cost in the manufacturing sector
(+0.5%), the number of housing permits approved (+0.9%) and the number of new companies registered (+0.8%)
as well as an improvement in CPI for services (inverted). These were, however, offset partially by a stagnant money
supply during the month. The broad-based improvement in economic indicators pushed the leading index’s six-
month smoothed growth rate to 11.2% in March, a rebound from +5.2% in February but off a peak of +12.9%
in November (see Chart 1). As a whole, the readings suggest that the economy will likely remain resilient even
though growth will likely moderate in 2H 2010.

◆ Similarly, the Coincident Index (CI), which is used to monitor the most recent state of the economy, picked up
to +1.6% mom in March, from +1.1% in February and compared with +1.5% in January. This was reflected in
a pick-up in gross imports (+0.3%) and employment (+0.2%) as well as a rebound in industrial production index
(+0.4%). These were, however, offset partially by a slowdown in salaries & wages in the manufacturing sector and
contributions to the EPF, while sales in the manufacturing sector remained stable during the month. On a six-month
smoothed rate basis, the CI index accelerated to +9.4% in March, from +7.0% in February and +5.6% in
January. This was the strongest growth in more than nine years, in line with a strong pick-up in real GDP
growth, which grew at a faster pace of 10.1% in 1Q 2010, after returning to a positive growth of 4.4% yoy in the
4Q.

◆ The Lagging Index (Lag), which serves to confirm what had happened to the economy, however, fell by 2.4% mom
in March, compared with +4.3% in February and +5.3% in January. This was due to a decline in lending to the private
sector (-4.1%). These were, however, mitigated by increases in the number of investment projects approved and
the number of new vehicles registered as well as a pick-up in the number of EPF contribution defaulters (inverted)
and the seven-day money rate. As a result, the six-month smoothed growth rate of the lagging index eased to 16.0%
in March, from +24.2% in February and compared with +17.2% in January, confirming that real GDP growth will likely
strengthen in 1Q 2010.

Chart 1
Leading Index

Index Growth rate*

20
160
140 15
120
100 10
80
5
60
40
0
20
0 -5
00 01 02 03 04 05 06 07 08 09 10

L e a d i n g In d e x ( L H S ) Y / Y (R H S )

* Growth rates are expressed as compound annual rates based on the ratio of the current month’s
index to the average index during the preceeding 12 month
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

A comprehensive range of market research reports by award-winning economists and analysts are Page 1 of 2
exclusively available for download from www.rhbinvest.com
 17 May 2010
◆ Overall, the pick-up in the leading index’s six-month smoothed rate of change suggests that economic activities
will likely remain resilient even though the pace will be slower in 2H 2010. We expect real GDP growth
to soften to 4.8% yoy in 2H 2010, from +8.8% in the 1H. This is in line with a slowdown in the global economy
in the 2H of the year, as the impact of government stimulus spending around the globe fades and austerity measures
in some European countries to address fiscal deficit and debt problems begin to bite. At the same time, the
normalisation and policies tightening measures in some countries will likely slow down economic activities in these
countries. Indeed, signs of a more moderate economic expansion in 2H 2010 are beginning to emerge in China.
Despite the weakness, we do not expect the global economy to fall off the cliff and into a double dip given
that policy normalisation and tightening remain gradual. We expect the sovereign debt problem in Europe to be
manageable despite the lingering concerns, following the announcement of an emergency stabilisation loan of €750bn
for countries under attack by speculators and the €110bn rescue package for Greece. Furthermore, investors’ risk
appetite has improved, as financial markets have stabilised and asset prices have reached a favourable inflection
point where investors are no longer fearful of catching a falling knife but view any weakness in asset prices as
investment opportunities. As it stands, the leading indicator, measured on a m-o-m basis, has been trending lower
for the last few months, indicating that OECD countries’ economies are likely to expand at a slower pace in the months
ahead. Similarly, although the OECD composite leading indicator’s 12-month rate of change strengthened for the
seventh consecutive month to 10.2% in March, from +10.0% in February, the gain is softening (see Chart 2).

Chart 2
Malaysia Leading Index vs OECD

20 OECD Composite 15

Leading Index
(RHS) 10
15

12-mth rate of change

6-mth rate of change

5
10

5
-5
Malaysia Leading index
0 (LHS)
-10
00 01 02 03 04 05 06 07 08 09 10

-5 -15

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB
Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances
as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be
reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB
Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy
or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no
reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may
from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial
circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI
recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of
a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and
objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out
of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing
activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking
and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its
own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the
respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking
or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this
report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and
may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking
personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received
compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm
revenues.

A comprehensive range of market research reports by award-winning economists and analysts are Page 2 of 2
exclusively available for download from www.rhbinvest.com