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ab29 September 2020Chief Investment Office GWMInvestment Research

Asia industrial tracker

Recovering from COVID-19

Contents

Asia industrial tracker This report has been prepared by UBS AG Singapore Branch and UBS AG Hong Kong Branch and UBS Securities Japan Co. Ltd. Please see the important disclaimer at the end of the document. Past performance is not an indica-tion of future returns.

Editor in Chief Dominic Schinder

Authors Philip Wyatt Yifan Hu Daiju Aoki Kathy Li Valerie Chan Delwin Kurnia Limas

Project manager Sita Chavali

Editor Aaron Kreuscher

CIO Content Design Michael Galliker Sunil Vedangi*

Contact [email protected]

* An employee of Cognizant Group. Cognizant staff provides support services to UBS.

Find out more: www.ubs.com/cio

03 Editorial

04 Key takeaways 04 Asia at a glance 06 Focus: ASEAN catch-up opportunity

09 Key indicators 09 Direction 10 Rank 11 Sector

14 Regional economies

14 China 16 Japan 18 Korea 20 Taiwan 22 Singapore 24 Malaysia 26 Indonesia 28 Thailand 30 Philippines 32 India

34 Methodology


UBS CIO GWM September 2020 3

Dear Reader,

Where is Asia in its industrial cycle?The answer to this question is an important determinant for investors and forms a crucial component in our asset allocation framework.

By employing our proprietary framework, we can ascertain where the region is overall as well as where each economy and specific industry are heading in their respective cycles. This publication arms investors with such insights and provides guidance on where we see opportunities based on this information.

Asia is a vibrant global manufacturing hub, so industrial manufacturing production is a key barometer of income generation and prosperity. While industrial activity in the region and globally was shattered by COVID-19 and the attendant lockdowns, regional industrial growth is pointing higher—but so far the recovery has been uneven.

China, the region‘s economic growth engine, is most advanced in the recovery, which should feed through to the rest of the region as part of its supply chain or through industrial relocation trends. But with the economic recovery broadening globally and in Asia, Southeast Asia (ASEAN) is set to rebound and catch up with its northern peers.

This turnaround gives investors the opportunity to take on thematic equity exposure to ASEAN, an attractively valued laggard which we think has solid earnings growth potential.

We hope you find this report and the insights useful for your business and when discussing your investment positions. As always, we welcome feedback and any questions you may have.

Editorial

Min Lan Tan Chief Investment Officer APAC UBS Global Wealth Management


4 UBS CIO GWM September 2020

The COVID-19 pandemic caused a very sharp quarterly economic growth drop for China in 1Q and Asia in 2Q. We expect a V-shaped recovery to mid-single-digit growth in 2H, given enormous policy support and global orders revival, beginning in July. In particular, we think ASEAN is set to turn around and catch up with its northern counterparts.

DirectionManufacturing production in Asia is reviving—it’s around halfway back to trend growth—after the sharp virus-induced slump in 2Q. But economies are at very different stages.

Economy Rank * Direction Sector **

Mainland China Tech, Transport

TaiwanTech, Basic

materials

Korea Tech, Machinery

SingaporeTech, Light

manufacturing

Japan Tech, Light

manufacturing

Malaysia Machinery, Tech

Indonesia Chemicals, Light

manufacturing

ThailandTech, Basic

materials

Philippines Chemicals, Energy

India Energy, Chemicals

RankManufacturing production in China is growing above trend and almost almost halfway to a typical peak. ASEAN and India are currently lagging, but we expect them to catch-up quickly in the coming two quarters.

SectorThe tech sector has accelerated during the pandemic back to its 5-year trend, with light manufacturing (incl. pharma products) and machinery starting to recover more in late 2Q. China’s capex plans and the global recovery should lift capital goods demand further. Auto production is weak, but auto demand post-Covid bears watching.

Singapore

43%IT’s share of manufacturing production. IT has softened due to the global slowdown, but bio and pharma are cushioning the blow.

India

29%Basic materials’ share of manufacturing production—it’s down >40% y/y this year. Light manufacturing and chemicals are in the early stage of a sequential rebound.

Key indicators

*range 1-5

**leading sector

Key takeaways

Asia at a glance



Philippines

32%Light manufacturing’s (mostly food & beverage) percentage of production—it’s down 31% y/y. Basic materials’ recovery has been very slow (12% weight). Sequential recovery hit by restrictions.

Taiwan

42%IT’s share of manufacturing production. IT is still growing over 20% y/y, a high not seen since 2017.

Japan

16%Transport sector’s share of manufacturing—it’s down 47% y/y this year, ranking as Japan’s worst-hit sector. Other sectors near decade lows. Inventories are much lower.

Korea

26%IT’s share of manufacturing production. IT has weak-ened due to the global slowdown, but it remains at trend; autos have been worse hit.

China

35%The combined share of production from IT, machinery and transport (autos)—all are above trend growth. Basic materials is also back to trend.

Malaysia

32%The combined share of pro-duction from IT, machinery and transport—all are re-bounding sharply. Pharma and other light manufactur-ing have also bounced.

Thailand

18%Transport sector’s share of manufacturing— it’s down >60% y/y this year, ranking as Thailand’s worst-hit sector. Chemicals (21% share) is also near decade lows, but inven-tory levels have fallen.

Indonesia

49%Light manufacturing’s (mostly food & beverage) percentage of production—it’s halfway way back to trend. Chemicals (11% weight) is above trend.




Relative performance favors ASEAN

110

90

70

130

150

170

Source: Bloomberg, UBS, as of September 2020

20192018 20202016 20172013 2014 2015201220112010

MSCI ASEAN Index

MSCI APAC Index

Spot performance, values standardized to100

Focus

ASEAN catch-up opportunity

ASEAN economic revival ahead Southeast Asia’s nascent growth revival calls for greater risk-taking in ASEAN (Singapore, Malaysia, Thailand, Indo-nesia, Philippines) equities, in our view. While ASEAN’s eco-nomic recovery is at least one quarter behind China’s, we expect economic activity to rebound in the quarters ahead, as signaled by our Asian industrial tracker framework (see Direction Indicators on pages 22, 24, 26, 28, 30). Leading indicators, like PMIs and accelerating money growth, sug-gest a firm activity upturn is ahead. They are also signaling the start of a new business cycle, which should lift indust-rial production and corporate earnings.

Equity value emerging, ready your riskThe ASEAN equity market has yet to recover fully from COVID-19. The pandemic, with its impact on financials, industrials, consumer discretionary and tourism-related industries, has led to an almost 20% underperformance of ASEAN versus the region since late March. But as earnings gradually improve quarter by quarter, we see an opportunity for investors to take on greater exposure to Southeast Asian markets. This view is based on our forecast for ASEAN ear-nings to rebound almost 20% in 2021 after contracting 30% in 2020. We think the opportunity in ASEAN equities is similar to that of earlier economic recoveries like after the dot-com bust in 2001, after the global financial crisis in 2010 and after the regional recovery in 2017.

MSCI ASEAN equity weights

♦ Singapore – 28.2%♦ Malaysia – 21.7%♦ Thailand – 23.7%♦ Indonesia –17.6%♦ Philippines – 8.8%



53

33

43

CIO estimate

38

48

2013 2017 20192015 2021-40

-30

10

0

-10

-20

20

Company earnings turnaround ahead

Source: Bloomberg, UBS, as of September 2020

Lead indicators bouncing back

ASEAN PMI (50=Neutral, monthly)

ASEAN annual earnings growth (% yoy, RHS)

ASEAN lowers risk with diversity

10

0

20

30

40

Source: JP Morgan, Bloomberg, UBS, as of September 2020

PH ID ASEANTHMYSG

30-day volatility

Current

10-year average of ASEAN 30-day volatility

ASEAN’s dividend yield on par with JACI IG’s yield

3.0

2.5

3.5

4.5

4.0

5.0

5.5

Source: Bloomberg, UBS, as of September 2020.

2019 2020201820172016

MSCI ASEAN Dividend Est

JACI IG YTM

In %

New post-Covid ASEAN equities total return story With this earnings growth story in mind, and the region’s price-to-book discount versus the broader Asia ex-Japan region at a 12-year low (15% discount vs. 6% premium at the start of the year), we think broad-based long positions in ASEAN equities provide investors an attractive risk-reward profile. We anticipate price returns of around 10% over a 6–12-month investment horizon and volatility of around 12%. Our price return target is driven by a

combination of our outlook for a steady sequential (q/q) earnings recovery and our expectation for a mid-single-digit valuation re-rating, which would bring MSCI ASEAN’s price-to-earnings ratio closer to the top range of its historical long-term valuation level. If we then add our expected 3% p.a. dividend yield to the return equation, ASEAN in our view becomes a good opportunity to position for the next stage of Asia’s economic recovery.

“With a 3% dividend yield, ASEAN becomes a good opportunity to position for the next stage of Asia’s economic recovery.”



Notation

How to read the chartsMajor industry sectors are defined in line with most national data standards

IT (Tech): All technology hardware segments such as com-puters, communications, optical, and other electronic equipment and components.

Transport (Autos): All motor vehicles, trailers, auto parts and other equipment.

Machinery: Machinery equipment, electrical equipment, general and special equipment.

Chemicals (Chems): All chemical material, rubber and pla-stic products.

Basic materials: Basic metals and alloys, fabricated metal products (except machinery), non-metallic mineral products and construction materials.

Energy: Coke, coal and lignite fuel briquettes; refined petroleum products; and nuclear fuels, electricity and gas.

Light manufacturing (Light mfg): All agricultural, food and beverage products; tobacco goods, wearing apparel, textiles, leather products, wood and paper, furniture, prin-ting and reproduction of recorded media, pharmaceutical and biological products (except Indonesia) cultural, educatio-nal, arts and crafts goods, sports and recreational products.

In the charts, these sectors are further grouped into three general categories: capital goods (IT, transport and machi-nery), intermediate goods (chemicals, basic materials and energy) and light manufacturing (finished consumer goods ex-IT/autos).

All charts/data in this report are as of June/July 2020, unless stated otherwise.A typical Direction indicator chart

-30

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Manufacturing growth, 3mma Next 2 stops

Global orders index

In %

A typical Direction indicator chart

-30

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Please see p34 for details on how to read the chart.


Key takeaways

• Recovery in progress – Manufacturing produc-tion in Asia is climbing (around halfway) back to trend growth, after the sharp virus-induced slump in 2Q, but the economies are in different stages.

• A brisk revival is expected due to the lack of big capex, excess capacity and inventory overhangs.

• Global support – Global order trends should support stronger production in 2H.

• Next stop – Asia may peak in 2H then plateau as China levels off and the rest of the region returns to trend.

How to read the Covid shock? The COVID-19 pandemic caused a very sharp quarterly drop for China in 1Q and Asia in 2Q. Big stimulus plus a desynchronized impact meant only minor inventory and capex overhangs. We expect a V-shaped production recovery in 2H, given enormous policy support and global orders revival, beginning in July.

Direction

The post-Covid 2Hrebound

Direction

Industrial production relative to trend

Source: CEIC, UBS

MY, PH, TH, ID, IN, JP

Halfway < trend

Halfway > trend

Trend IP growth

SG, KR

CH, TW

Asia Direction indicator – now past the bottom

-8-6

20

-2-4

12

64

810

Source: CEIC

2018 20202016201420122010

Asia manufacturing production growth Next stop

In %

Asia’s manufacturing production is reviving in 2H



China and North Asia in the lead, but Singapore and Malaysia to catch up

Rank

Watching out for ASEAN catch-up

Key takeaways

• Leading economies – Mainland China and North Asia manufacturing production growth is above trend, almost halfway to the typical peak. Taiwan slid slightly in 2Q.

• Middle cluster – Korea and Singapore slightly ahead of the rest of Asia which plunged in 2Q and remains sub-trend.

• Lagging economies – SE Asia (ex-Singapore), India and Japan slid twice as much in 2Q than in a typical slump.

• ASEAN catch-up – In 2H, we expect production to lift in the smaller open economies as trade revives (starting with Singapore). India’s micro-economic indicators are also rising despite high infection rates.

How the Covid impact differs? Trade linkages to China and the tech sector have been differentiating factors, helping North Asia and Singapore. The virus-induced slump has not just hit small open economies. It has had a deeply negative impact on manufacturing production in the large domestic-driven economies (India, Indonesia, the Philippines) due to shutdowns.

100

0

-100

200

-300

-200

Manufacturing production deviation from trend

Note: 0 = trend growth, 100 = 1x z-score, 200 = 2x z-scoreSource: CEIC

Z-score distance from peak or trough

IDINTHCH TW KR SG PH MY JP

March June

Industrialboom

Industrialslump

Leading economiesLagging economies

KR

SG

CH

Rank



Sector

Tech sector support overshadows general collapse

0

-4

-8

8

4

-16

-12

Upturn ahead for capital goods

Source: CEIC

In %

Chem-icals

Tech Lightmfg

Energy Mach-inery

Basicmaterials

Trspt Total

Industrialboom

Industrialslump

Latest % growth (3mma) 3 months ago 5-year average

Key takeaways

• Tech cushion – The tech sector has accelerated during the pandemic back to its 5yr trend, aid-ing economies with heavy share of tech.

• Laggard sectors – Transport (mainly autos), as a premier consumer discretionary segment, has been hit the worst, followed by chemicals dur-ing the oil price plunge.

• Rapid improvers – Light manufacturing (e.g., pharma products), machinery and equipment sectors have been fastest to recover since June. China’s capex recovery should boost capital goods (machinery, autos and tech).

Which sectors has Covid impacted the most? The technology sector has held up best, with Taiwan and Sin-gapore avoiding a dip alto-gether. A temporary divergence occurred as sectors in mainland China recovered in 2Q but sank to multi-year lows elsewhere in Asia. Across most markets, two sectors—light manufacturing (pharma and medical related) and machinery & equipment—have fared relatively well.

Industry sub-sectors, by share

Source: CEIC

IT

Autos Chemicals

Light mfg

Basic materialsMachinery & eqpmt

Energy

PH

TW

KR

MY

TH

CH

JP

ID

IN

SG

Capital goods Intermediates Light mfg

0.2 0.6 0.80.0 1.00.4

Watching for non-tech turnaround

Sector


Where is the journey heading?

Regional economies



ChinaChina has already rebounded from Covid and has room for broader recovery.

Where is China in its industrial produc-tion cycle and where to next?

• Direction – Production in China displayed sharp V shape from 1Q (contraction) to 2Q (rebound). We expect it to peak higher in 2H on stronger investment.

• Sector ranking – IT, transport (mainly autos), machinery sectors well above trend, while inter-mediate products slightly below trend.

• Global orders correlate less well with China’s production due to its big domestic market. But stronger global demand helps.

What is the impact of COVID-19? China has led the region. In 1Q, it experienced a steep downspike in manufacturing production during the strict Covid lockdown. In 2Q, production rebounded as sharply, with local outbreaks of negligible impact. Generous stimulus and further investment impetus in 2H should support elevated production. Escalating Sino-US tensions have yet to impact tech-sector growth.

Current industrial production relative to 5-yr trend

Source: CEIC, UBS

Light mfg

Basic materials

Chemicals, Energy

Transport, Tech, Machinery

Trend growth

Heading above trend

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

China manufacturing growth, 3mma Next stop

Global orders index

In %

Direction


China

A picture of general recovery to trendRank

Sector

Contribution to manufacturing production

-9

-6

-3

0

3

6

9

Source: CEIC

2019 20202018201720162015

Manufacturing production index (wtd % contr)

%YoY, 3mma

Light manufacturing goods

Intermediate goods

Capital goods

Growth in capital goods

-30

-20

-10

0

10

20

Source: CEIC

2019 20202018201720162015

Transport

Tech (IT)

Machinery and equipment

Capital goods

%YoY, 3mma

10

8

6

4

12

-2

0

2

China’s recovery gathering pace – half the sectorsabove trend

Source: CEIC

In %

EnergyTrspt Tech Machi-nery

Basic materials

Chemi-cals

Lightmfg

Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights

♦ Tech – 11%♦ Machinery – 17%♦ Energy – 10%♦ Basic materials – 20%♦ Light mfg – 24%♦ Chemicals – 11%♦ Transport – 7%

• Capital goods sector – IT, machinery and transport (35% of overall mfg. production) have rebounded in step and are growing above trend, in our view. Global recovery and faster investment should offer extra lift in 2H.

• Inventories are stabilizing and manufacturing sales are rising again after the collapse in 1Q, supporting production. Producer prices are

strengthening but still negative in y/y percentage terms.

• Intermediate sectors – Basic materials is back to trend and should rise further on infrastructure investment expansion, further supporting upstream commodity prices. Chemicals/plastics and energy have rebounded but are below trend. Light manufacturing is well below trend.



JapanCovid produced a severe 2Q slump that crushed the autos sector.

Where is Japan in its industrial produc-tion cycle and where to next?

• Direction – Production in Japan is in a major slump—at its worst point since 2009. We expect a rebound in 2H.

• Sector ranking – The auto sector has borne the most pressure, but bears watching in a post-Covid world. All other sectors are at decade lows.

• Global orders signal recovery and correlate moderately to Japan’s production. Domestic machinery orders and capital goods shipments starting to bottom out.

What is the impact of COVID-19? The Covid-induced slump turned a soft patch into a major contraction despite Japan’s relatively low infection rates. The recovery underway in China and globally should help restore manufacturing production back to its (regionally slow) trend


Source: CEIC, UBS

Transport, Light mfg, Chemicals, Energy, Tech,Machinery, Basic materials

Trend growth

From bad to worse in 2Q, looking for a path back up

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Japan manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Japan

A bleak 2Q picture for capital goods productionRank

Sector


-25

-20

-15

-10

-5

0

5

Source: CEIC

2019 20202018201720162015


%YoY, 3mma


Intermediate goods

Capital goods


-50

-40

-30

-20

-10

0

10

Source: CEIC

2019 20202018201720162015

Transport

Tech (IT)

Machinery and equipment

Capital goods

%YoY, 3mma

0

-10

-20

-30

10

-50

-40

Transport the main drag, but better shipmentssuggest turnaround

Source: CEIC

In %

Machi-nery

Tech Lightmfg

Energy Basic materials

Chemi-cals

Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Capital goods sector (46% of overall mfg. production) contracted 26% y/y in 2Q, led by autos (16% weight), which contracted 47%. Recovery in China should help. Modest shipment recovery starting in semiconductors, displays and transport equipment.

• Inventories fell sharply 2Q, particularly in autos and some IT products. As shipments recover, a

rebound in capital goods production should follow suit. Producer pricing is stable.

• Intermediate goods (basic materials, energy, chemicals and plastics) are also clustered together and down 25%. Light manufacturing has been less impacted.



KoreaCovid produced a moderate 2Q slump in Korea due to the tech cushion.

Where is Korea in its industrial produc-tion cycle and where to next?

• Direction – Production in Korea sank below trend in 2Q, a moderate dip. We expect it to return to trend in 2H.

• Sector ranking – The IT/tech sector is above trend but past the 1Q peak. All other sectors are below trend and close to the trough.

• Global orders correlate well with Korea’s pro-duction. Stronger global (and China) recovery would likely lift Korean production to trend.

What is the impact of COVID-19? The Covid-induced slump interrupted a technology-sector-led recovery in production and investment, following a weak period through 2018–2019. We expect the recovery to resume from 2H onwards with help from the Korean government’s New Deal incentives for 5G and re-onshoring tax incentives.


Source: CEIC, UBS

Chemicals, Basic materials,Energy, Autos

Trend growth

Light mfg

Tech

Heading back to trend in 2H

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Korea manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Korea

A mixed picture beneath the surface of capital goods productionRank

Sector


-6

-4

-2

0

2

4

6

8

Source: CEIC

2019 20202018201720162015


%YoY, 3mma


Intermediate goods

Capital goods


-20

-10

0

10

20

30

Source: CEIC

2019 20202018201720162015

Transport

Tech (IT)

Machinery

Capital goods

%YoY, 3mma

5

0

-5

-10

10

-20

-15

Many Korean industry sectors slowed in 1H butshould recover in 2H

Source: CEIC

In %

Chemi-cals

Tech Machi-nery


Lightmfg

Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Globally-induced correction hit Korea’s capital goods sector in 2Q. The tech sector (26% share of overall mfg. production) just past its 1Q peak and is now back to trend.

• Inventories across industries rose through 2Q but are peaking out now and shipment/inventory ratios are rising again—a typical prelude to production recovery. Producer pricing is stabilizing.

• Lagging sectors: Autos (9% industrial share) extended its contraction in 2Q, but auto demand may expand independently in a post-Covid world. Light manufacturing (10%) should turn up as domestic consumption responds to stimulus. The machinery & equipment (8%) sector should ride on the expansion of Chinese investment.



TaiwanCovid’s impact was very minor due to strong containment and the tech cushion.

Where is Taiwan in its industrial produc-tion cycle and where to next?

• Direction – Taiwan production dipped but remained above trend in 2Q. We expect it to return to trend in 2H.

• Sector ranking – The IT/tech sector is at a peak not seen since 2017, fed by a 5G/AI component boom. Basic materials and machinery are just sub-trend.

• Global orders correlate well with Taiwan’s pro-duction. Stronger global (and mainland China) recovery should keep production up in 2H.

What is the impact of COVID-19? The Covid-induced slump presented only a minor dip to manufacturing production in 2Q, because the rebound in mainland China and its focus on 5G have been a major support for Taiwan. In addition, local investment has been supported by ongoing re-shoring of certain industries away from mainland China. This supports the local economy.


Source: CEIC, UBS

Chemical, Energy, Light mfg, Transport

Machinery, Basic materials

Tech

Trend growth

Staying above trend in 2H

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Taiwan manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Taiwan

A huge skew toward tech in capital goods productionRank

Sector


-10

0

10

20

Source: CEIC

20202018201620142012


%YoY, 3mma


Intermediate goods

Capital goods


-20

-10

0

10

20

30

Source: CEIC

2019 20202018201720162015

Transport

Tech (IT)

Machinery

Capital goods

%YoY, 3mma

10

15

5

20

0

-5

-10

25

-20

-15

Taiwan tech expansion continues

Source: CEIC

In %

EnergyTech Basic materials

Chemi-cals

Machi-nery

Lightmfg

Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Strong capital goods – The dominant tech sector is close to historical peak growth (42% of mfg. production), in our view, and was barely affected by the global pandemic correction in 2Q. Machinery (7%) is soft but just sub-trend.

• Inventories rose – Shipment/inventory ratios declined in 2Q, which suggests an inventory build is possible amid Sino-US tensions. July

export orders jumped recently. Producer pricing is firm.

• Weaker sectors – Basic materials (19%) is soft but just sub-trend, perhaps benefitting from re-onshoring and China demand. The others are close to the bottom and should recover in 2H, in our view.



SingaporeCovid had a minor impact on man-ufacturing in 2Q thanks to support from tech and bio-products.

Where is Singapore in its industrial pro-duction cycle and where to next?

• Direction – Singapore production sank just below trend in 2Q, a moderate dip. We think it’s headed back above trend in 2H.

• Sector ranking – IT, light manufacturing and machinery sectors have supported manufactur-ing. Other sectors likely at the trough.

• Global orders correlate well with Singapore’s production. Stronger global (and China) recovery would likely lift production back to trend.

What is the impact of COVID-19? Singapore was heading out of a dip when Covid struck. There was a major impact for services, but only a minor interruption for manufacturing in 2Q. The pandemic also generated a spike in biological and pharma (light manufacturing) products in March and April, which has since unwound. We see a general rebound ahead.


Source: CEIC, UBS

Machinery

Light mfg

Tech

Trend growth

Transport, Chemicals,Basic materials, Energy

Heading back above trend in 2H

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Singapore manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Singapore

A mixed picture beneath the surface of capital goods productionRank

Sector


-10

0

10

20

Source: CEIC

202020192017 201820162015


%YoY, 3mma


Intermediate goods

Capital goods


-20

-30

-10

0

10

20

30

40

Source: CEIC

2019 20202018201720162015

Transport

Tech (IT)

Machinery

Capital goods

%YoY, 3mma

10

0

-10

-20

20

-40

-30

Recovery should broaden in 2H

Source: CEIC

In %

Basic materials

Tech Lightmfg

Machi-nery

Chem-icals

Energy Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Capital goods sector – IT (43% of mfg. produc-tion) corrected to below trend in 2Q, but machin-ery (10%) held up just above trend—both were a bit suppressed by the global slump in 2Q.

• Intermediate goods (basic materials, energy, chemicals and plastics) are also clustered

together at the trough, hit partly by the oil sector’s travails in 2Q.

• Light manufacturing sector (23%) has been boosted by the virus, as the biological and pharma product categories grew dramatically in March and April.



MalaysiaCovid produced a dramatic general slump in 2Q led by transport, energy, chemicals and basic materials.

Where is Malaysia in its industrial pro-duction cycle and where to next?

• Direction – Production in Malaysia sank below trend in 2Q, in a severe slump. It should bounce back to trend in 2H.

• Sector ranking – All below trend, but intermedi-ate goods hit the hardest. Capital goods and light manufacturing goods have bounced.

• Global orders provide some guide to Malaysia’s production. Stronger global (and China) recovery would boost production.

What is the impact of COVID-19? The Covid-induced slump hit Malaysia hard, particularly the intermediates sectors (energy, materials and chemicals/plastics). Capital goods (IT and machinery) and light machinery (biological goods) have been quick to show a bounce.


Source: CEIC, UBS

Basic materials, Energy,Chemical, Transport

Trend growth

Light mfg, Tech, Machinery


-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Malaysia manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Malaysia

A big drop in 2Q, but starting to bounce Rank

Sector


-20

-15

-10

-5

0

5

10

Source: CEIC

2019 20202018201720162015


%YoY, 3mma


Intermediate goods

Capital goods


-20

-10

0

10

20

Source: CEIC

2019 20202018201720162015

Tech (IT)

Transport

Machinery

Capital goods

%YoY, 3mma

0

-10

-20

-30

10

-40

Malaysian industry is still struggling – recovery in 2H

Source: CEIC

In %

TrsptMachi-nery

Tech Lightmfg

Energy Chemi-cals

Basic materials

Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Capital goods sector – Weakness in 2Q mostly driven by transport sector. IT (19% of manufacturing. production) and machinery (6%) have bounced but remain weak.

• Intermediate goods, the dominant sector (basic materials, energy, chemicals and plastics

combined have 43% weight), collapsed on energy and oil weakness.

• Light manufacturing sector (23%) has bounced with pharma, food & beverage and other products helping at the margin.



IndonesiaCovid produced a broad slump in 2Q, driven by capital goods includ-ing transport.

Where is Indonesia in its industrial pro-duction cycle and where to next?

• Direction – Production in Indonesia sank below trend in 2Q.

• Sector ranking – Transport and capital goods suffered the most; chemicals and light manufac-turing the first to revive.

• Global orders do not correlate particularly well with Indonesia’s production.

What is the impact of COVID-19? The impact of Covid does not appear to have been as heavy on Indonesia as on other emerging market Asian econo-mies. Still, it experienced an industrial goods-led slump with light manufacturing (almost half of overall production) as a counterbalance. Indonesia may see a relatively slower recovery to trend in 2H given its higher reliance on domestic deman-dand still-high Covid infection rates.


Source: CEIC, UBS

Tech, Machinery, Energy,Transport, Basic materials

Trend growth

Light mfg

Chemicals

High infections could mean delayed recovery in 2H

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Indonesia manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Indonesia

Likely to be in very early stages of industrial turnaround

Sector

Rank


-5

0

5

10

Source: CEIC

202020192017 201820162015


%YoY, 3mma


Intermediate goods

Capital goods

ID % growth of IP Intermediate, light mfg goods

-10

-15

-5

0

5

10

15

Source: CEIC

2019 20202018201720162015

Basic materials

Light mfg

Energy

Chemicals & plastics

%YoY, 3mma

5

0

-5

-10

-15

-20

10

-30

-25

Watching transport and light manufacturing sectors

Source: CEIC

In %

TechChem-icals

Lightmfg


Machi-nery

Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Light manufacturing sector is the most important in Indonesia, accounting for nearly half of the economy’s overall manufacturing production, dominated by food & beverages and tobacco (30%). It also has the highest trend growth rate.

• Intermediate goods – Chemicals (12%)—which includes pharma products—has has done

relatively well and is growing above trend. Basic materials (7%) is also a key cyclical sector which should rise alongside global trends in 2H and respond to any lift in construction.

• Capital goods sector is driven by swings in transport (8%) which, while very weak, should respond to higher spending on autos post-Covid;



ThailandCovid produced a severe 2Q slump that crushed its auto sector. The post-Covid auto recovery bears watch ing.

Where is Thailand in its industrial pro-duction cycle and where to next?

• Direction – Production in Thailand sank below trend in 2Q, in a deep dip. We expect it to turn around in 2H.

• Sector ranking – All below trend, but capital goods, led by autos, hit the hardest. Turnaround not yet visible.

• Global orders – Provide occasional guide to Thailand’s production. Stronger global (and China) recovery would boost production.

What is the impact of COVID-19? The Covid-induced slump has hit Thailand hard. Aside from the tourism sector, manufactur-ing production has also been hammered and is taking longer than its neighbors to turn around. Like Japan, autos have been hit the hardest, but post-Covid auto demand should recover as people travel more domestically. Thailand’s tech sector is closer to trend.


Source: CEIC, UBS

Basic materials, Energy,Chemical, Transport

Trend growth

Light mfg, Tech, Machinery


-30

-15

0

15

30

45

Source: CEIC

2018 20202016201420122010

Thailand manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Thailand

A bleak 2Q picture for capital goods production

Sector


-25

-20

-15

-10

-5

0

5

Source: CEIC

2019 20202018201720162015


%YoY, 3mma


Intermediate goods

Capital goods


-20

-30

-40

-50

-10

0

10

20

Source: CEIC

2019 20202018201720162015

Transport

Tech (IT)

Machinery

Capital goods

%YoY, 3mma

-10

0

-20

-30

-40

-50

-60

-70

10

-80

Thailand industry is still struggling – recovery in 2H

Source: CEIC

In %

Machi-nery

Tech Basic materials

Chemi-cals

Lightmfg

Energy Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Capital goods sector – Autos, as a big component (18% of manufacturing. production), has suffered the most, contracting almost 70% amid the global slump in 2Q. In contrast, tech products (11%) saw a moderate dip.

• Intermediate and light manufactured goods – Chemicals, which dominates intermediate goods

(21% share), remains close to the trough, in our view, hit partly by the oil sector’s travails in 2Q.

• Inventories – Overall inventories fell around 11% through 2Q and shipments started to turn in June. So we think a revival in manufacturing should begin in 2H alongside recovering global demand.

Rank



PhilippinesCovid produced a severe broad-based slump in 2Q.

Where is the Philippines in its industrial production cycle and where to next?

• Direction – Production in the Philippines sank below trend in 2Q, in a moderate dip. We expect it to return to trend in 2H.

• Sector ranking – Most sectors have seen the worst drops in almost a decade; chemicals and plastics have been the least bad.

• Global orders correlate reasonably well with Phil-ippine production. Stronger global recovery would boost production back to trend, in our view.

What is the impact of COVID-19? The Covid-induced slump hit most Philippine sectors hard due to the strict shutdowns in 2Q. The domestic components of light manufacturing may take longer to rekindle given high infection rates and extended lockdowns. Global-linked industries should recover earlier.


Source: CEIC, UBS

Trend growth

Machinery, Energy, Basic materials,Chemicals, Autos, Light mfg


-30

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

Philippines manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


Philippines

Production generally hard hit by the strict shutdownsRank

Sector


-40

-30

-20

-10

0

10

20

Source: CEIC

2019 20202018201720162015


%YoY, 3mma


Intermediate goods

Capital goods

PH % growth of Intermediate, light mfg goods

-40

-50

-10

-20

-30

0

10

20

30

40

Source: CEIC

2019 20202018201720162015

Energy

Basic materials

Light mfg


%YoY, 3mma

-10

0

10

-20

-30

-40

-50

-60

-70

20

-80

Philippine industry is weak, but should recover in 2H

Source: CEIC

In %

Machi-neryl

Chemi-cals

Energy Lightmfg

Basic materials

Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Capital goods sector – Massive drop in trans-port and machinery/electrical equipment sectors (9% and 25% of overall mfg. production, respectively).

• Intermediate goods – Steep drops in basic materials and energy (27%) as domestic con-

struction collapsed amid shutdowns. Chemicals and plastics sectors hit the least.

• Light manufacturing sector (32%) also very hard hit, down over 30%.



IndiaLooking up from deep collapse in 2Q production.

Where is India in its industrial production cycle and where to next?

• Direction – India’s production sank to multi-decade lows in 2Q but bounced in June.

• Sector ranking – Most sectors close to trough, in our view, but light manufacturing and chemi-cals are recovering.

• Global orders guide for moderate support for production.

What is the impact of COVID-19? The Covid-induced impact on India was deep in 2Q, with April the worst month. The shutdowns meant a lot of migrant labor returned home, resulting in a production lag in re-opening. Another obstacle is the continued high infection rate. This could mean a slightly more delayed return to trend growth for production relative to the region.

Current industrial production relative to 5 yr trend

Source: CEIC, UBS

Machinery, Transport, Machinery,Tech, Energy, Basic materials

Trend growth

Chemicals, Light mfg


-40

-30

-20

-10

0

10

20

30

Source: CEIC

2018 20202016201420122010

India manufacturing growth, 3mma Next 2 stops

Global orders index

In %

Direction


India

Watching for rebound in light manufactured goods, chemicals and autosRank

Sector


-50

-40

-30

-20

-10

0

10

Source: CEIC

2019 20202018201720162015


%YoY, 3mma


Intermediate goods

Capital goods


-20

-30

-40

-10

0

10

20

Source: CEIC

2019 20202018201720162015


Intermediate goods

Energy

Light mfg

%YoY, 3mma

-10

0

-20

-30

-40

-50

-60

-70

10

-80

At the trough – intermediate and lightmanufacturing products should recover in 2H

Source: CEIC

In %

TechEnergy Chemi-cals

Lightmfg

Basic materials

Machi-nery

Trspt Total

Latest % growth

Industrialboom

Industrialslump

5-year average

Sector weights


• Capital goods sector is still small in India (17% of overall mfg. production). Transportation should bounce back quickly once confidence returns later in 2H, given the consumer link and low cost of funds.

• Intermediate goods (60%) and light manu-facturing (24%) are the biggest components.

We saw early sequential improvement in the lat-ter, particularly pharma (7%), and chemicals/plastics (13%) in 2Q.



There are three basic chart types: direction, rank and sector indicators.

The direction indicator and the rank indicators rely on the same basic stylized cycle analysis. The direction indica-tor shows the year-on-year growth rate of the actual manu-facturing production index, and provides guidance for the next two possible cyclical positions (the next “one or two stops”). We use a 3-month average to smooth minor spikes and allow for a more quarterly assessment. This is shown alongside our diffusion index for global order activity, expressed in year-on-year growth.

On the direction indicator page, there is also a sine wave summarizing the latest location of manufacturing produc-tion growth in different Asian economies.

To obtain a fix on the cyclical position, a given economy’s manufacturing production growth is assigned a time length (peak to peak is typically 2–3 years) and Z-scores are calcu-lated with production growth since 2010. Using the aver-age peaks and troughs, the scale of a typical boom-and-slump trend (adjusted for historical drift) is established. A stylized cycle is divided into eight segments bordered by a peak, trough, trend and four halfway points. Recent values of production growth are then placed in a position accor-

ding to the Z-score distance from the historical trend and peak. In the direction indicator chart, the next two stops represent the successive two locations, assuming manu-facturing growth progresses through such a stylized cycle. For example, if an economy›s production today grows close to trend and is in an environment of rising global order activity, then the next stop would be halfway above trend and the one after that a peak.

The rank indicator chart shows the speed of production expansion. The recent datapoint and that of three months ago are shown as a percentage of the Z-score distance from a typical peak or trough. For example, 100% or more would signify an economy’s production growth as being at a typical business boom, while close to zero means produc-tion growth is running at its trend rate (adjusted for histori-cal drift).

The sector indicator chart simply shows the 3-month average of the recent growth rate for individual industry sectors (as defined above) versus that three months ago, also versus a five-year average. The same format is used in the economy pages. The individual economy pages also display this information on a stylized sine wave where the trend is taken as the five-year average growth rate and the current position shown versus the last peak and trough.

Cyclical methodology

How to read the charts


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