In this article, Prudential Assurance Malaysia Berhad’s Investment Market Strategist, Esther Ong, explains that global markets declined in October as investors became more cautious about AI-related stocks and questioned whether heavy investments in AI would deliver sufficient returns. While AI remains an important growth driver, concerns over adoption rates, rising costs and geopolitical tensions weighed on market sentiment.
She also highlights that higher oil prices and ongoing global conflicts raised inflation concerns and increased expectations of higher interest rates. Despite market volatility, Esther notes that the global economy continues to grow, supported by consumer spending and AI investments. In Malaysia, economic growth remains resilient, backed by strong exports and low inflation, although the local stock market continued to face pressure from external uncertainties and investor caution.
Global equity markets fell in October as AI-related stocks sold off sharply, after previously driving much of the market’s gain. Overall, global equity market fell 2.2% month-on-month (MoM), meaning compared with the previous month, while US technology shares dropped3.3%. Other markets that recorded with significant losses included Korea, down 20.5%; Taiwan, down 4%; China, down 7.8%; and Japan, down 4.5% MoM. The Malaysian equity market also declined 3.5% MoM, partly affected by negative news from Indonesia, where equities dropped 14% MoM. Meanwhile, the broader US share market, which includes a wider mix of industries, fell a smaller 0.8% MoM as non-technology sectors showed signs of recovery.
Despite October’s decline, global equity markets remained higher year-to-date (YTD). Global equities gained 10.7% YTD, supported by strong performances in Korea of 33.5%, Taiwan of 59% and Japan of 25.9%. However, Malaysian equities were down 4.2% YTD, while China and Indonesia continued to lag, posting declines of 11.6% and 38.0%, respectively.
Investors became more cautious about AI-related stocks. They questioned whether future returns would justify the huge spending on AI infrastructure, especially as investment and borrowing costs rise. While investors still believe AI can generate revenue by helping businesses work more efficiently. However, they are concerned about how quickly businesses will adopt AI. In addition, increased regulatory scrutiny of security following recent major cyberattacks may also slow investment spending. Meanwhile, AI-related companies continued to raise capital. Meta Platforms joined Alphabet and Intel in raising funds, seeking USD98 billion through a share sale for AI-related investment. Anthropic PBC has filed for a public listing, with a potential valuation approaching USD2 trillion, significantly higher than USD183 billion a year ago.
At the same time, high oil prices remained a concern as the US-Iran conflict and Houthi-Arab attacks continued. Oil prices rose 18.2% MoM to USD115.17 per barrel, bringing the YTD increase to 91%. Furthermore, Trump recently suggested that the US-Iran conflict could continue into next year. Persistently high oil prices, coupled with supply disruption costs and strong demand driven by AI-related investments, could continue to exert upward pressure on inflation. As a result, central banks worldwide would therefore be likely to maintain interest rates steady or raise them to keep price increases under control. With an additional two to three US interest rate increases expected, the US dollar is expected to remain strong in the near term.
In the past, higher oil prices have pushed bond yields higher and bond prices lower. However, bond prices rose despite higher oil prices this month, recovering from the previous month’s losses. Growing concerns about a global economic slowdown led some investors to shift capital away from AI-related equities and corporate debt towards government bonds, which are generally seen as safer investments. Nevertheless, bonds in some European countries outside the region’s core markets declined as investors feared that concerns about France’s ability to repay its debt could spread to other markets. Global bonds gained 0.7% MoM, reducing their YTD loss to 1.6%. Malaysian bonds also gained 0.7% MoM, bringing their YTD return to a small gain of 0.2%.
Despite these concerns, recent economic data suggest that the global economy is still growing. Strong investment on AI infrastructure and steady consumer spending have supported growth, helped by rising employment and household wealth. However, the risk of an uneven economy is growing, with technology-related businesses doing well while traditional sectors experience slower growth. China shows a similar picture, where exports grew faster than usual, while domestic consumer spending remained weak. Weak consumer spending, together with a restrained rollout of policies to support the economy, has contributed to further falls in Chinese equities, leaving their YTD returns negative.
In Malaysia, the underlying economy remained resilient. Full-year growth expected to reach around 5%, supported by the preliminary third quarter growth estimate and continued stronger-than-expected export growth. Inflation remained low, providing Bank Negara Malaysia (BNM) room to avoid raising interest rates in the near term. Meanwhile, Budget 2027that was announced in October, was seen as consumer-friendly, with a strong emphasis on supporting household spending. The budget maintained government spending to support the economy while committing to gradually strengthening public finances. Despite these positive economic and corporate developments, Malaysian equity market continued to fall reaching new lows. Investors were unsettled by rising bond yields, continued capital outflows and concerns about Malaysian companies with business exposure to Indonesia. The latter concerns followed MSCI’s proposal to move Indonesia from its Emerging Market index to a standalone index. In addition, investors also remained cautious about political developments and the potential for policy changes ahead of the upcoming election in 2027.
Market Outlook
Local market
Bond Market Outlook – Positive and stable
The bond market should stay steady, supported by manageable inflation, stable policy and positive demand-supply conditions.
- Inflation should stay manageable at 2%–2.5%.
- BNM policy should stay supportive even if BNM may raise rates by 25bps to 3%.
- Demand and supply remain positive, as fiscal deficit reduction is still on track.
Equity Market Outlook - Positive
The local equity market should continue to rise, supported by strong economic fundamentals and domestic investment initiatives.
- Economic conditions remain resilient.
- Government investment initiatives support remains strong as well as robust AI spending and Data Centre developments.
- Economic growth is projected at 5%, with fiscal deficit on track to decline.
- Corporate earnings growth expected at 5%–10%.
- Low foreign shareholding.
- Pre-election uncertainty may create opportunities on positive news flows.
Global Equity Market Outlook - Neutral
Global economic activity continues to expand.
- AI-related spending and computing demand remain strong.
- Earnings expectations continue to be positive, helped by manufacturing and steady consumer spending, while valuations are not cheap and market had an extended run.
- Global monetary policy is still mostly supportive of growth despite some tightening.
Risks and Global Context
- Short-term pullbacks are possible due to geopolitical tensions, higher inflation, higher interest rates and near-term USD strength.
- Global growth may slow as higher interest rates may weigh on consumer spending weakens and tariff uncertainty weigh on trade.
- U.S. inflation may rise or stay high due to tariffs and oil shocks. Still, the Federal Reserve remains focused on price stability.
Investment Strategy:
Market returns can differ by country and asset class. To manage risk, investors should diversify across equities and bonds.
Given higher geopolitical risks and tariff uncertainty, we continue to recommend a balanced portfolio, with 50%–60% in equity funds and 40%–50% in bond funds.
For diversified exposure, investors may consider PRULink Managed 2 Fund, PRULink Managed Plus Fund and PRULink Strategic Managed Fund. For bond exposure, PRULink Bond Fund 2 may help provide more stable income and or reduce equity risk. For local and Asian equities, investors may consider PRULink Equity Income Fund, PRULink Equity Plus Fund and PRULink Dragon Peacock Fund. For global equities, PRULink Global Strategic with Hedging Fund, PRULink Global Market Navigator and PRULink Global Leaders Fund are preferred. However, for a holistic multi assets and multi managers strategy approach, PRULink Elite Growth and PRULink Elite Balanced are recommended for PRUPresitge/Elite Invest/Elite Flex product.
