Glenn Maguires Asia Sentry Dispatch

July 30, 2012

How long can talk trump data?

The Draghi effect was still virtuously apparent in Asia this morning with all regional equity markets (with the exception of Shanghai) gaining on hopes that European policy makers were ready to take sufficient actions to arrest the debilitating European debt crisis. The Draghi effect must indeed be a powerful one, for it trumped what was some pretty woeful data in the region. Against expectations of a 1.5%MoM rise, Japanese industrial production fell by 0.1%MoM in June. Meanwhile, South Korean manufacturing sentiment plunged to a three year low in August. A 9.6%YoY decline in Thailands industrial production in June was similarly overlooked when this data was released on Friday. All in all, the breadth (the number of economies) and depth (the shortfall of actual outturns relative to consensus) of the data disappointments in June confirms that more than a salve from Draghi is required. Asia finished Q2 and is entering Q3 in a very weak position. Based on the uniform and surprise weakness in tech-heavy economies such as Japan, South Korea and Taiwan as well as the terrible figures in key components supplier Thailand, coupled with the extremely rare miss in earnings estimates by Apple, the consumer led ICT sector may be beginning to slow sharply.
Industrial production weakness in Japan and Thailand related to components highlighting a weak ICT sector.

Source: Asia Sentry Advisory and Bloomberg

Monday, July 30, 2012.

Page |1

Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Global ICT demand weakness thwarts Thai supply recovery.

Thailands IP data is always worth watching given the importance of Thailand as a components supplier and assembler to the global ICT sector. The Thai production data had been recovering as factories brought capacity back on line following flooding that had seriously disrupted production. Indeed, the 6.0%YoY increase in IP over May appears to have been the high-point of this dynamic. Compared to a consensus forecast of a 0.8% decline in IP over June, IP collapsed by 9.6% over the year. The weak year-over reading was driven entirely by an 8.0%MoM decline, the sharpest decline since November 2011, at the height of flood disruptions. The fact that capacity utilisation posted a fairly hefty decline coincident with production over the month of June is consistent with the view that most of the recovery in Thai IP to date has been due to a supply side recovery. What we are seeing in June, with capacity utilisation declining from 74.26 to 72.41 and headline output contracting is that the supply side recovery has now run its course and it is global weakness in the ICT sector that will cap production. Looking at the breakdown of the Thai IP data reveals a 31.4%YoY decline in office and computing machinery, subtracting 10.8ppts from overall manufacturing growth. Output of radio, television and communication equipment was down 39.8% over the year. Still, other sectors continued to improve. Production of motor-vehicles and trailers rose by 40.3% over the year.

Japan IP much weaker than expected, South Korea to follow suit.

Japanese manufacturing has now contracted for each month of the second quarter. Given industrial production accounts for around one-third of the economy, like South Korea last week and Taiwan this week, Japan Q2 GDP is expected to cool significantly. What is particularly ominous for the Asia outlook is the complete lack of evidence that activity will rebound in Q3. South Korean manufacturing sentiment released this morning plunged to a three year low in August. The South Korean sentiment measure has been more tightly correlated with actual industrial production at turning points, and the abrupt weakening in sentiment in the past two months suggests that a chunkier correction in Korean industrial production is now likely in Q3.

Todays Conclusion: The Draghi effect continues to trump woeful data outturns in Asia. Regional IP data confirms the region ended Q2 on a weak footing and partial data plus sentiment indicators confirm production will continue to weaken into Q3. A rare earnings miss by Apple, coupled with significant weakness in Thailands (the regions components supplier) suggests the consumer led ICT sector may be weakening thereby capping any Asian recovery in H2-2012.

Monday July 30, 2012.

Page |2

Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Asia Sentry Advisory Pty Ltd Suite 9, Level 40, Northpoint Tower 100 Miller Street, North Sydney, NSW, 2060, Australia. Ph: +61 2 9931 7820 Fx: +61 2 9931 6888 M: +61 401 548 820 www.asiasentry.com gbmaguire@bloomberg.net glenn@asiasentry.com

Asia Sentry Advisory Pty Ltd is a boutique economic consultancy established to meet the growing demands of clients seeking greater exposure to the most dynamic economic region in the post-crisis global economy, Asia. Asia Sentry Advisory marries keen judgment with a rigorous model-based approach and a deeply intuitive understanding of Asia that can only come from on-the-ground experience to deliver market out-performing analysis and forecasts.
How closely are you watching?
Follow us on Twitter, @AsiaSentry Watch us on YouTube. Asia Sentry Advisory See us analyze in real-time on LiveStream, Asia Sentry Advisory