Navigating Inflation, Interest Rates, and Equity Markets

With the global economy finishing the 1Q 2024 on a strong note, the global equity market likewise ended the month strong, up +4.87% Year-to-Date (YTD) in March, with outperformance in Malaysia up +8.95% YTD March. The strong finish was supported by improving manufacturing activity globally, while consumer spending generally remains resilient despite the high interest rate environment. However, the flip side of the positive economic activity in the US is that the “soft landing” or “Goldilocks” scenario the equity market rallied on seems to have grown faint, alluding to lesser positive narrative. 

The positive US economic activity has kept the job market and services activity in check, although the 1Q 2024 GDP slowed. This, together with higher oil prices, has largely led to higher-than-expected US inflation. The 15.47% YTD rise in oil price was due to a combination of supply cuts by OPEC+ and especially by Russia, higher-than-expected global demand, tight inventories, and a recent rise in geopolitical risks. As a result of the higher inflationary expectations in the US, the market expectations of interest rate cuts have been pulled back to 1-2 rate cuts starting in 4Q 2024, instead of the US Fed’s dot plot guidance of 3 rate cuts, and a far cry from the market’s aggressive 6 rate cuts expectation in early 2024.  Such a change to a “higher for longer” rates scenario in the US is contrary to ECB’s more dovish stance, with an ECB rate cut likely in June and not dependent on the US rate cut plan. The implications of the higher inflationary expectations and “higher for longer” interest rates environment in the US would also likely be a challenge for countries in Asia like Malaysia to cut rates earlier than the US, given the already wide interest rate differential and the potential to further drag down the Malaysia Ringgit. 

Such a change to a “higher for longer” narrative therefore has put a threat to the “soft landing” narrative the global equity market was hoping for and lower rates in Asia.  Coupled with some mixed corporate earnings, April saw a global equity market down -2.7% Month-on-Month (“MoM”) and bonds down -2.52% MoM (YTD April -4.56%). However, for Malaysia, in line with our argument, the local equity market has done well, up + 2.70% MoM (YTD April up +8.45%), including China +1.32% MoM (YTD April up +4.46%). The positive local equity market drivers were a pickup in 1Q GDP estimated to be +3.9% YoY (4Q 2023: +3.0% YoY) underpinned by broad-based growth across all sectors, a 1Q rebound in exports to 2.2% YoY (4Q 2023: -6.9% YoY), and progressive construction job wins. Besides, the market optimism was also partly due to the China market seeming to be bottoming out, with better China economic activity reportedly expected to move into expansionary stage, as evidenced by the 1Q GDP up 5.3% YoY, above the consensus forecast of 4.8% YoY, with policy stimulus support despite the overhanging weak property market and consumer sentiment. 

Overall, we maintain our constructive positive outlook on equities with a preference for local equity market, including Asia, for better expected return relative to risk, while investment positioning in the local bond market remains for risk diversification and expected stable return. Nevertheless, we are increasingly positive on the global equity market as recent market weakness offers investment opportunity, adjusting from earlier market optimism, as well as our belief that with the overall economy remains hovering at positive note, positive equity market momentum should broaden widely from earlier concentration in tech related sectors. Key investment risks for 2024 could arise from inefficiency of local policy execution, sticky inflation rate, US higher rates for longer, and rising US – China trade tension with the impending November US election. 

Given PAMB’s array of funds offerings with respect to geographical coverage and investment styles, PAMB funds can ride in tandem with the global market performance. Given our more positive outlook on Asia and the bond market, we prefer PRULink Managed 2 Fund and PRULink Managed Plus Fund for investment diversification; PRULink Equity Plus and PRULink Equity income for Malaysia exposure; Asia Growth Fund, PRULink Asia Equity Fund and PRULink Asia Managed Fund for Asia exposure.

*28/4/2024

Written by Esther Ong

 Esther Ong is the Investment Market Strategist of Prudential Assurance Malaysia Berhad (PAMB).Esther is a qualified Chartered Financial Analyst as well as having obtained MSc Investment Management and BSc Insurance & Investment with a Financial Markets Association of Malaysia (Persatuan Pasaran Kewangan Malaysia or PPKM) license.

This feature is to provide general information on the current situation of the economy with the information available at the given time. This feature does not constitute investment advice and cannot be used or substituted as such. The opinions of the author may not necessarily reflect the views of Prudential Assurance Malaysia Berhad.