In this article, Prudential Assurance Malaysia Berhad’s Investment Market Strategist, Esther Ong, discusses how global markets were influenced by healthy corporate earnings, continued investment in artificial intelligence (AI) and steady economic growth, while investors also grappled with rising oil prices, tariff developments and geopolitical tensions. She explains how concerns over AI-related valuations contributed to a pullback in technology stocks and uneven market performance across regions, even as broader markets remained relatively resilient.
While short-term volatility may persist, maintaining diversification across local and global equity and bond funds may help investors stay focused on long-term opportunities amid an evolving market environment.
Global markets were broadly unchanged in July as investors balanced healthy earnings and continued excitement around artificial intelligence (AI) against worries over interest rates, oil prices, tariffs and geopolitical risks. Global equities rose slightly by 0.3% month-on-month, but performance was uneven. Developed markets held up better, with the US and Europe both rising about 0.7%, while Asia ex-Japan fell 3.5% and Japan dropped 6.6%. Malaysia was more resilient, gaining 1.1%.
The main reason for the uneven performance was due to a pullback in technology and growth in stocks. The Nasdaq declined 1.3%, while Korea and Taiwan were also weaker. China’s market came under pressure mainly because technology companies fell. Investors started to question whether AI-related stocks had become too expensive after a strong run. A new lower-cost AI model from China also raised concerns that competition could rise and profit margins could narrow. As a result, investors became more cautious towards AI-related companies after a strong rally earlier in the year.
Even so, the broader market did not fall much because non-technology sectors helped offset the weakness. Traditional areas such as consumer, value and defensive stocks provided support. This suggests that investors were not moving away from equities altogether, but were becoming more selective in where they invested.
Meanwhile, oil prices also rose sharply as geopolitical risks increased. Investors worried about possible disruption to key supply routes, especially around the Strait of Hormuz and the Red Sea shipping lanes. Higher oil prices can increase inflationary pressures and reduce consumer spending power, leading investors to consider whether the US Federal Reserve may keep interest rates elevated for longer. As a result, the US dollar strengthened, while equities and bonds faced some pressure.
Tariff risks also added to the caution. New US tariff measures affected many trading partners, although Malaysia appeared less affected because it had already reached earlier agreements with the US. In some markets, such as Korea, heightened volatility led investors who had borrowed money to invest to reduce their exposure, adding further pressure on share prices.
Despite the weak month, global equities were still up about 9% year-to-date. Japan and Asia ex-Japan remained among the strongest performers, up 28% and 21% respectively, while the US and Europe were both up about 8%. The AI theme remained important, but investors are now demanding stronger proof that AI spending can translate into sustainable earnings growth. Bonds continued to struggle because yields stayed high amid inflation concerns.
The global economy is still growing, but at a slower pace. Services activity remained supportive and recession risk stayed low, although uncertainty increased. The US economy stayed fairly strong, helped by AI-related business investment and steady consumer spending. While inflation remained above target, recent data showed some improvement as energy prices eased. Corporate earnings continued to hold up well. Europe continued to expand, supported by improving economic momentum.
China’s growth slowed during the quarter but it is expected to remain close to 5%. Exports and AI-related investment helped support activity, although consumer spending subdued as the property market remained under pressure. Investors continued to look for government support measures to stabilise growth.
Malaysia remained relatively stable. Bank Negara Malaysia kept the policy rate unchanged at 2.75% and maintained its 2026 growth forecast of 4.0% to 5.0%. Inflation was manageable, while domestic demand, tourism recovery and electronics or AI-related exports supported the earnings outlook. Malaysian bonds stayed resilient, although equities performed better.
Market outlook
Local market
Bond Market Outlook - 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% (2025: 1.4%), though it may remain above 2% in the near term.
- Policy should stay supportive, with rates more likely to be kept unchanged than raised, as price pressure is mainly supply-driven.
- Demand and supply remain positive, as fiscal deficit reduction is still on track.
Equity Market Outlook - Positive
The local equity market may continue to rise, but at a slower pace.
- Economic conditions remain resilient, but growth may moderate as tariff- and war-related activity fades and inflation slows consumption.
- Policy support remains strong, backed by the 13th Malaysian Plan and Budget 2026. AI spending and Data Centre developments could support selected companies.
- 2026 GDP growth is projected at 4-4.5%, with fiscal deficit targeted at 3.5%. Higher fuel subsidies may lift the deficit near term, but impact should be limited as Malaysia is a net oil exporter.
- Corporate earnings should recover, with 2026 earnings growth expected at 5%–10%.
- Low foreign shareholding and a weaker USD trend could attract inflows, though near-term USD strength may delay this.
- Pre-election uncertainty may create opportunities if investors expect better sentiment and more economic initiatives after the election.
Global Equity Market Outlook - Neutral
- Global activity continues to grow.
- AI-related spending and computing demand remain strong.
- Earnings expectations are improving, helped by manufacturing and steady consumer spending.
- Productivity may improve, helping to control inflation.
- US policy remains focused on price stability, helping anchor long-term inflation expectations.
- Global policy is still mostly supportive of growth.
Risks and Global Context
- Short-term pullbacks are possible due to geopolitical tensions, higher inflation, higher rate risk and near-term USD strength. Markets are also vulnerable as valuations are no longer cheap, gains remain concentrated in technology, and the upcycle is mature.
- Global growth may slow to around 3% or lower as consumer spending weakens and tariff uncertainty weighs on trade.
- Even if the US/Iran war ends quickly, damage to Middle East energy infrastructure could keep energy and supply chain prices high, weighing on growth. Severe shortages could raise stagflation risk, but this looks unlikely for now because of the war truce.
- Corporate earnings could weaken as companies face higher costs and consumers spend less.
- U.S. inflation may rise or stay high due to tariffs and oil shocks, which could delay rate cuts. Still, the Federal Reserve remains focused on price stability.
Tailwinds and Opportunities
- Lower geopolitical tension, better productivity and controlled inflation could support markets. Other positives include policy support, possible rate cuts, strong AI-related spending and broader market leadership beyond AI.
- Volatility may continue, but market weakness could create investment opportunities as growth and earnings outlooks remain positive and recession risk is low.
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 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.
