In this article, Prudential Assurance Malaysia Berhad’s Investment Market Strategist, Esther Ong, explains that global markets rose in July, supported by strong company earnings, steady economic growth and continued interest in artificial intelligence (AI). She notes that while AI remained a key market driver, some technology stocks saw pullbacks as investors reassessed valuations, leading to broader market gains across different sectors.
She also highlights that rising oil prices, geopolitical tensions and tariff uncertainty created market volatility and pressured bond markets. Despite these risks, Esther says Malaysia’s economy remains resilient, supported by investment, data centre growth and stable consumer spending, while diversification across equities and bonds remains important.
Global equity markets continued to recover in July and ended the month higher, although markets were still volatile at times. Overall, global equities rose 3.8% month-on-month (MoM), bringing year-to-date (YTD) gains to around 13%. Developed markets outperformed, with both the US and Europe up about 3% MoM. In Asia, performance was mixed: China declined 3%, Korea rose 5%, while Malaysia gained 1% MoM and about 3.3% YTD.
The stronger performance in the US and Europe was supported by steady economic growth. Meanwhile, China was weaker due to domestic demand and investment slowed, although government support for growth and innovation helped technology-related sectors. In Malaysia, indicators such as trade, loan growth and industrial production remained supportive of the local equity market.
Artificial intelligence (AI) remained an important market theme, especially as investors saw more signs that companies were generating real revenue from AI products and services. However, AI-related stocks did not all move in the same direction. Some AI-related stocks corrected as share prices adjusted to earnings expectations and valuations. Market gains became broadened, with value and quality stocks recovering. The US technology sector rose 3%, broadly in line with the wider market.
Moreover, equities were also supported by strong second-quarter earnings, ongoing economic expansion and reduced concern over further US interest rate hikes. Sentiment improved after US inflation softened in July, while the labour market remained resilient. The minutes of the US Federal Reserve’s meeting also suggested that policy is become more neutral, balancing the risk of persistent inflation against the risk of slower growth.
Bond markets remained weak compared with equities, despite some recovery in August. The global bond market rose 1% MoM but remained flat YTD, while the Malaysian bond market delivered only a modest return of 0.6% YTD.
One of the key factors weighing on bond market was the sharp rise in oil prices, which raised concerns that inflation could accelerate again. Oil prices rose about 8% MoM, surpassing USD90 per barrel, and were up around 57% YTD. At the same time, geopolitical risks increased after the 60-day US-Iran truce ended without a deal, leaving the Strait of Hormuz closed. In addition, markets were closely monitoring developments surrounding the Iran/Oman deal and the fragile Yemen-Saudi Arabia situation, as both could affect global oil supply.
In addition, bonds were also affected by changing US interest rate expectations. Markets saw lower chances of further US rate hikes as the Federal Reserve’s adopted a more neutral tone compared with its earlier hawkish stance. This happened despite softer inflation data and the US Treasury increasing buybacks of long-term US Treasury bonds. Meanwhile, higher interest rate prospects in Japan also weighed on market sentiment. In Malaysia, large foreign outflows from the bond market in July weakened investor confidence, even though July inflation eased slightly to 1.8%.
Despite the external trade risks, Malaysia’s economic outlook remains healthy. Growth in 2026 is likely to be close to 5%, near the upper end of Bank Negara Malaysia’s forecast range of 4.0% to 5.0% forecast range, supported by growth of above 5% in the first half of the year. Key drivers include domestic investment, government initiatives, data centre development and stable consumer spending. Furthermore, with inflation remaining under control and Bank Negara Malaysia maintaining a neutral stance, the policy rate is expected to remain at 2.75%. This should continue to support growth.
Overall, Malaysia’s solid economic backdrop and Bursa Malaysia’s efforts to encourage listed companies to create greater investor value should help the local equity market. However, political noise may still make investors cautious, although this could partly offset by positive-market and economy-friendly developments before the upcoming election.
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%.
- 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.
- 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.
- Global growth may slow to around 3% or lower as consumer spending weakens and tariff uncertainty weighs on trade.
- 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.
