In this article, Prudential Assurance Malaysia Berhad’s Investment Market Strategist, Esther Ong, explains that global markets were more cautious in September as higher oil prices, rising interest rates and geopolitical tensions weighed on investor sentiment. While global equities were flat during the month, AI-related companies continued to support market performance, driven by strong demand for computing power and AI infrastructure.
She also notes that tighter monetary policy and liquidity conditions pressured both equity and bond markets. Despite these challenges, Malaysia’s economy remains resilient, supported by domestic investment, data centre development, and steady household spending. Esther adds that local bonds have become more attractive following recent market weaknesses, while positive measures in Budget 2027 could help boost investor confidence and support local equities.
Global equity momentum weakened further in September, with gains and losses across markets leaving global equities broadly flat month-on-month (MoM). The US market rose by 0.4% MoM while Asia ex Japan gained 0.9%. In contrast, Europe declinded by 2.8%. Similarly, Malaysia declined 2.7%, like Indonesia’s 4.2% fall. Despite the weaker momentum in July and August, global equities remained up 13.2% year-to-date (YTD), led by the US at +13.1% and Asian markets at +25.8%. Meanwhile, Malaysia posted a modest return of +1% YTD, whereas China fell 4.9% and India dropped 11.4%.
Higher oil prices were the main drag on market performance during the month. Oil price rose 20.1% MoM, peaked at USD110 per barrel, and ended the month near USD100. The increase reflected rising Middle East tensions, including worsening US-Iran and Saudi-Yemen conflicts, as well as higher Chinese oil imports. Looking ahead, the outlook remains highly volatile and will largely depend on US-Iran negotiations.
With inflation still high and economic growth proving resilient, global central banks started monetary policy tightening bias. Inflation in both US and European are around 3%, above the long-term 2% target. In September, the US and European central banks raised rates to 3.75% and 2.65%,marking their first and second increase, respectively. Both central banks also signaled the possibility of further action if inflation stays high, with markets currently pricing in additional 2 to 3 rate hikes.
The coordinated tightening of global liquidity has reduced investors’ willingness to take risks. As a result, equity markets have retreated or traded cautiously, while bonds have sold off. Although liquidity risk has increase, they remain manageable because economic growth is still strong. Nevertheless, the investors are monitoring it closely because governments and AI companies require significant debt funding supported by large amounts of collateral, creating potentially serious market risks.
Despite broader economic uncertainties, AI-related companies continue to provide key support for equity markets despite broader economic risks. Strong demand for computing power and AI infrastructure continued to support earnings expectations. Positive news included Meta Platforms Inc’s AI agent, Muse, becoming the top one ranked free application on both the Apple App Store and Google Play Store, as well as Alibaba’s launch of the Zhenwu V900, China’s most powerful AI chip. The US technology sector advanced 2.5% MoM, while Korea and Taiwan gained 2% and 3.6%, respectively. However, tighter regulation and funding gaps remain risks. Encouragingly, market gains also spread beyond momentum-driven and AI-focused stocks to value and quality stocks.
Global bond returns turned negative in September as rising oil prices, recent US and European rate increases, and expectations of further hikes raised concerns. Global bonds declined by 2.1% MoM, taking the YTD return to -2.3% after a flat August. Similarly, Malaysian bonds reversed their modest gains recorded in August, leaving YTD returns at -0.5%.
The local bond market also weakened after Bank Negara Malaysia (BNM) adopted a more hawkish signal than expected. BNM shifted from neutral to slightly hawkish, allowing room to raise rates as growth is forecast at around 5%, despite inflation remaining under control. Although no immediate increase is expected, BNM could raise rates by 25bps to 3% in 2027, effectively reversing an earlier pre-emptive rate cut during the tariff war. After the recent price decline, local bonds now offer an attractive investment opportunity as markets have largely priced in 1-2 BNM rate hikes.
Meanwhile, Malaysia’s economic outlook remains strong despite increasing risks to external trade. Growth continues to be supported by government-supported domestic investment, data centre development, and stable household consumption. Against this backdrop, Bursa Malaysia’s initiatives to encourage companies to enhance shareholder value and strengthen investor returns provide additional support for the local equity market. Although recently political noise has made investors more cautious, confidence could improve if Budget 2027 introduces favourable measures for both the economy and capital markets.
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.
- 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.
