With inflation and geopolitical risks still contributing to volatility, policy support and continued investment in AI may help underpin growth, even as high energy costs remain a near-term headwind. Diversifying across local and global equity and bond funds can help investors manage market swings as conditions evolve.
In April, global stock markets bounced back strongly from the March low, rising by 8.6% month-on-month (MoM). This recovery wiped out most of the earlier losses caused by the US–Iran war and wider Middle East tensions. In contrast, global bonds inched up 1.2% MoM with yields remain at the higher band.
Oil prices stayed high, with Brent crude at USD108 per barrel, up 79.6% year-to-date (YTD), keeping bond yields elevated. As investors became more comfortable taking on risk, the US dollar index fell to 2%, while gold slipped lower to 0.8% month-on-month (MoM). The Malaysian ringgit strengthened to around RM3.95 per US dollar before easing slightly to about RM3.97 by month-end.
April’s gains more than offset March’s losses, lifting markets back into positive territory for the year. Global equities are up 6.4% year-to-date (YTD), led by Japan, up 18.2% in JPY, and Asia ex Japan (excluding Japan), up 14.5%, with Malaysia up 4.4% in MYR. Bond markets lagged amid renewed inflation concerns: global bonds delivered a modest 0.4% YTD, while Malaysia’s bond market gained 0.60%.
The equity market rebounded in early April, after a two-week US–Iran ceasefire was announced, which was later extended. Markets improved because investors expect the conflict to eventually end, given the upcoming US midterm elections and the pressure on Iran’s economy from disrupted oil revenue.
Even with the ceasefire, the US and Iran have not reached a full agreement. Disruptions around the Strait of Hormuz, and blockades affecting Iran’s ports and Iran-linked trade are still in place. With oil production in the Middle East not yet returning to normal, this has created a supply shock in oil and other goods. As a result, oil has been trading at around USD 90–110 per barrel. With higher inflation concerns, central banks such as the US Federal Reserve and the ECB have sounded more hawkish, pushing bond yields higher and keeping bond prices weak.
The rebound in equities was driven not just by the ceasefire, but also by unexpectedly strong US corporate earnings and renewed optimism surrounding artificial intelligence (AI) in both the US and Asia. US GDP grew by 2% in the first quarter, largely thanks to robust investment in AI-related sectors, while consumer spending remained resilient, supported in part by tax incentives. Recent AI breakthroughs, including Anthropic Mythos in the US and DeepSeek-V4 in China, further boosted sentiment and reinforced expectations for increased local computing demand in China.
People felt more comfortable taking risks because the global economy was doing fairly well before the Iran conflict, even though growth slowed a bit in March. While major central banks are being more cautious, they continue to make decisions based on incoming data and are keeping an eye on how the situation develops.
More recently, the Citigroup Economic Surprise Index for developed markets slipped slightly into negative territory as post-war data came in weaker than expected. If the US–Iran conflict drags on, supply chain disruptions could worsen as inventories and oil reserves are drawn down. This would likely keep commodity prices (including oil) high. Over time, that could hurt global growth and pressure stock markets—especially when valuations are already high, particularly for AI-related stocks, and company guidance is becoming more cautious.
Oil-producing countries such as the US and Malaysia are generally better cushioned from higher oil prices. In contrast, large oil importers like the Eurozone and parts of Asia are more exposed to rising energy costs. The Eurozone grew only 0.2% in the first quarter and remains sensitive to oil price spikes and supply disruptions, even with ongoing fiscal support.
China’s growth has also softened, but its economy remains supported by domestic consumption, a steadier property market, and continued investment in technology and strategic infrastructure. With strong renewable energy adoption and ongoing policy support, China’s growth outlook remains intact at 4.5%–5%. However, the Middle East conflict, US trade probes, and the risk of tariffs re-escalating could create headwinds in the near term.
In Malaysia, growth has slowed slightly, with less growth in the industrial production and growth area. Even so, the economy is still supported by strong demand for electrical and electronic products and steady domestic consumption. As an oil producer, Malaysia is less vulnerable to the risk of high oil prices, so the 4%–4.5% growth outlook remains intact. However, if oil prices stay high for longer, the government may have to spend more on petrol and diesel subsidies, and higher costs could gradually feed into broader price increases.
In March, Bank Negara Malaysia (BNM) kept its policy rate at 2.75%, because growth was still resilient (an early estimate shows 5.3% growth in the first quarter) and inflation was still mild (1.7% in March). However, BNM highlighted higher uncertainty ahead. For now, it is expected to keep rates steady, since supporting growth remains a priority and inflation is likely to stay under control, unlike in some countries where stronger inflation may force further rate increases.
Market Outlook:
Bond Market Outlook
We expect bonds to stay relatively stable, supported by:
- Inflation is expected to stay low, at about 1.5%–2.5% (up from 1.4% in 2025, but still relatively low).
- BNM will likely keep interest rates unchanged (or cut them if needed), since price pressures are mainly coming from higher oil costs.
- The government is still working to narrow the budget deficit, so the amount of new bonds coming to the market should stay manageable.
- Investor demand remains steady, from both Malaysian and overseas buyers.
Equity Market Outlook
Malaysia’s stock market is likely to stay supported by:
- The global and Malaysian economies are still in a good place, even if growth slows for a while because oil prices are higher.
- Government support and new investment projects, including plans under the 13th Malaysia Plan.
- Budget 2026 steps that keep spending under control while providing more help for people who need it.
- Malaysia’s economy is expected to grow 4%–4.5% in 2026, with a budget shortfall of about 3.5%. Higher fuel subsidies should be manageable as Malaysia sells more oil than it buys.
- Company profits are improving, with earnings growth of about 5%–10% expected in 2026.
- If the US dollar weakens, more overseas investors may put money into Malaysia. The ringgit is also holding up fairly well.
- As the local election gets closer, the government may roll out more policies and economic initiatives, which could support the market.
Risks and Global Context
- Markets could fall in the near term if political tensions rise, especially as share prices are already high and most gains have come from tech stocks.
- Global growth could slow to about 3% (or lower) as spending cools, job markets soften, and trade frictions increase.
- High oil prices linked to the Iran conflict may keep energy costs elevated and weigh on growth around the world.
- If the conflict drags on, energy shortages and supply disruptions could worsen—raising the risk of both higher inflation and weaker growth.
- Company profits could come under pressure as costs rise and consumers pull back on spending.
- US inflation may stay sticky for a while, which could push back interest rate cuts. Over the longer term, the Fed still aims for 2% inflation.
- A further worsening of global tensions and new or higher trade tariffs.
Tailwinds and Opportunities
Supportive policies—such as fiscal stimulus, possible rate cuts if needed, strong AI-related investment and demand, and broader market leadership beyond only mega-cap AI names—should help markets over time. Volatility is still likely because of economic uncertainty and geopolitical risks. However, any market pullback could create opportunities, given that growth and earnings prospects remain positive and recession risk appears low.
Investment Strategy:
Returns can differ by region and asset class, so it is safer to diversify across markets.
Given higher geopolitical risks and renewed tariff uncertainty, we continue to recommend a balanced portfolio of 50%–60% in equity funds and 40%–50% in bond funds. For diversification, consider PRULink Managed 2 Fund, PRULink Managed Plus Fund, and PRULink Strategic Managed Fund. For bond exposure (to earn more stable income and diversify equity risk), PRULink Bond Fund 2 is suggested. For local and Asian equity exposure, consider PRULink Equity Income Fund, PRULink Equity Plus Fund, and PRULink Dragon Peacock Fund. For global equity exposure, PRULink Global Strategic with Hedging Fund, PRULink Global Market Navigator, and PRULink Global Leaders Fund are preferred.
