In this article, Prudential Assurance Malaysia Berhad’s Investment Market Strategist, Esther Ong, reviews the factors that supported May’s market gains, including the easing of US–Iran tensions, resilient global growth, and continued momentum in AI-related markets, while also assessing the impact of elevated oil prices, sticky inflation and higher bond yields.
With geopolitical and inflation risks still likely to drive volatility, maintaining diversification across local and global equity and bond funds may help investors stay invested while managing uncertainty as market conditions evolve.
In May, global stock markets continued to recover strongly following the Iran conflict ceasefire, rising by 4.3% month-on-month (MoM). Gains were led by AI-related with US technology up 6.1% MoM, Korea up 24.5% and Taiwan up 11.9%. In contrast, global bonds fell 0.58% MoM, as yields rose by 5-10bps amid inflation concerns and expectations of further rate hikes.
The strong market gains in May have pushed markets into new highs. Global equities are up 10.2% year-to-date (YTD), led by Japan, which has gained 29.1% in JPY, and Asia ex-Japan (excluding Japan), up 23.9%, while Malaysia up 3.3% in MYR. In contrast, global bonds have underperformed equities YTD amid rising inflation concerns and a more hawkish rate bias, with returns down 0.3%. Malaysia’s bond market however, remains up 0.60%, supported by still manageable inflation and limited expectations of near-term rate hikes.
Oil price, a key market concern, stay elevated through much of the May due to tensions surrounding the Iran conflict. By month end, prices eased below USD100 per barrel as reports pointed to positive progress in US-Iran negotiation. Even so, Brent crude remain high at USD98.4 per barrel, up 63.4% year-to-date (YTD), which kept bond yields elevated amid concerns over the secondary impact of higher oil prices on goods and services. Meanwhile, US dollar inched up higher 0.3% MoM, although it remained marginally weaker YTD. Correspondingly, the Malaysian ringgit slightly weakened to around RM3.97 against the US dollar.
Equity market risk appetite remained firm, as investors continued to expect the US-Iran conflict to eventually ease, given the upcoming US midterm elections and pressure on Iran’s economy from disrupted oil revenue. More broadly, global markets were driven by several key factors. First, global economic growth remains positive, which continues to support risk assets, although the momentum is slowing and remains uneven across countries. US growth remains positive, the Eurozone has contracted while China’s outlook is mixed with steady external trade activity but softer domestic activity. Second, inflation is becoming a greater concern, higher energy, supply chains, and tariff costs weigh on both consumers purchasing power and company profit margins. Third, while corporate earnings have been supported by the AI-related narrative, corporate earnings may face pressure as businesses face higher input costs that are not yet fully passed on to customers. Moreover, central banks are certainly moving away from low-interest rate environment and shifting towards a more hawkish stance as inflation rises. Finally, external risks such as oil price shocks, fragile US-Iran talks, geopolitical tensions, and trade policies continue to influence market sentiment and could quickly shift the outlook. Taken together, these factors suggest that while markets can still climb higher, the environment is likely to be more volatile, with more limited upside than in earlier cycles. In this context, the Goldilocks scenario of low inflation, stable interest rates and healthy growth, which supported earlier market optimism, appears increasingly unlikely.
Separately, on the domestic front, economic growth remains steady with 1Q GDP coming in above expectations 5.4% (prior 6.2%), supported by slightly firmer services and manufacturing. However, growth momentum has slowed, signalling moderation in domestic demand particularly within the services sector. This is also consistent with the slower than expected industrial production growth and tepid domestic exports growth. Nevertheless, Malaysia’s key growth drivers remain intact, supported by resilient consumer spending, multiple investment initiatives, data centre developments, E&E manufacturing and tourism. GDP growth for 2026 is expected at 4.5% (BNM 4-5%). That being said, Malaysia’s growth risk could rise if the Iran conflict is prolonged. Meanwhile, inflation is likely to rise in the near term due to higher energy and food prices, broader pass-through of higher energy prices in non-fuel items and supply chain disruptions.
While Bank Negara Malaysia (BNM) kept it’s policy rate unchanged at 2.75% in April, it appears to be shifting from downside growth risks to upside inflation risks. BNM reiterated its data-dependent approach. For now, it is expected to keep rates steady, as supporting growth remains a key priority and inflation is expected remain manageable, in contrast to some countries where stronger inflation may force further rate increases. BNM expects growth of 4-5% and inflation of 1.5-2.5% for 2026.
Market Outlook:
Bond Market Outlook
We expect bonds to stay relatively stable, supported by:
- Inflation is expected to remain manageable at around 1.5%–2.5%, up from 1.4% in 2025 but still relatively low.
- BNM is likely to keep interest rates unchanged, or ease if needed, as price pressures are mainly driven by higher oil costs.
- The government continues to work towards narrowing the budget deficit, which should keep bond supply manageable. However, higher petrol and diesel subsidies could push the deficit slightly higher and pose some supply risk.
- Investor demand remains steady from both domestic and foreign buyers.
Equity Market Outlook
Malaysia’s stock market is likely to stay supported by:
- Global and domestic economic conditions remain broadly supportive, even if growth moderates due to higher oil prices.
- Government support and new investment initiatives, including plans under the 13th Malaysia Plan.
- Budget 2026 measures aimed at fiscal discipline while continuing targeted support for those most in need.
- Malaysia’s economy is expected to grow by 4%–4.5% in 2026, with a budget deficit of about 3.5%. However, higher fuel subsidies could widen the deficit and cap ringgit strength or foreign inflows.
- Corporate earnings are improving, with growth of about 5%–10% expected in 2026.
- A weaker US dollar could support foreign inflows into Malaysia, while the ringgit has remained relatively resilient.
- As the local election approaches, the government may introduce further policies and economic initiatives that could support the market.
Risks and Global Context
- Markets could correct in the near term if political tensions escalate, especially as valuations are already elevated and recent gains have been concentrated in technology stocks.
- Global growth could slow to around 3% or lower as consumption moderates, labour markets soften, and trade frictions increase.
- High oil prices linked to the Iran conflict may keep energy costs elevated and weigh on global growth.
- If the conflict is prolonged, energy shortages and supply disruptions could worsen, raising the risk of both higher inflation and weaker growth.
- Corporate earnings could come under pressure as costs rise and consumers become more cautious.
- US inflation may remain sticky in the near term, delaying interest rate cuts and keeping rates higher for longer. Over the longer term, the Fed still views long-term inflation expectations as anchored.
- A further escalation in geopolitical tensions, or the introduction of new or higher trade tariffs, remains a key downside risk.
Tailwinds and Opportunities
Supportive policies, including fiscal stimulus, potential rate cuts if needed, strong AI-related investment and demand, and broader market leadership beyond only mega-cap AI names, should continue to support markets over time. Volatility is still likely to persist amid economic uncertainty and geopolitical risks. However, any market pullback could create opportunities, as 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 funds that offer diverisficaiton, 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.
