Diversifying Amidst Uncertainties

Both the bond and equity market globally continued to climb higher from March rebound with global equities (MSCI AWCI (USD) index) +0.6% MoM and local bond (iBoxx ALBI Malaysia Non-Government index) +0.7% MoM, while local equity (FBM100 Index) eased off from gain to close -0.2% MoM. Nevertheless, the climb was at a much lower market volatility pursuant to the US regional banking turmoil in March. Overall, the market volatility hovered at the year low as indicated by the VIX Index (Chicago Board Options Exchange Volatility Index) which dropped 22% YTD to about 16-17. The overall low market volatility while due to reasons technical in nature and indirectly reflects current market calmness, also suggests requiring caution monitoring of risky assets such as equities because there is market complacency in buffering for significant economic momentum slow down or economy activity instability due to the cumulative negative impact of rate-hiking cycle since 2022.  Nevertheless, the market jittered towards month end following the significant fall in First Republic Bank price with the disclosure of massive plunge in deposits in the aftermath of the meltdown of Silicon Valley Bank.

Having said that, YTD 2023 has exhibited positive market performance with global equity +7.5% YoY and local bond +3.7% YoY, except for local equity market that reported dismal performance of about -3.1% YoY. The general positive market performance was in tandem with the positive trending economic data in the US, Europe and China as underpinned by services sector given robust consumption growth. Nevertheless, the growth rate will likely be subdued in coming months as the underlying trend has exhibited weakness in manufacturing and trade activity, while the service inflationary pressure remains sticky, and the US unemployment rate remains strong despite slowing wage growth. As such, given the positive economic backdrop and inflationary pressure yet to ease to central banks’ comfort level, the monetary tightening policy likely to continue for another 1 hike in US and 2 or 3 hikes in Europe. As such, the recession risk in the US remains elevated.

At our local front, while economic growth could face downside risk due to weaker external trade growth consequential to the developed markets’ slowing growth, the domestic growth expectations remain intact supported by local spending growth and the tourism recovery with tourist arrivals as of December 2022 recovering to 92% of December 2019 levels, driven by visitors from Singapore. There is still much tourism upside as the China and Hong Kong tourist arrivals are only back to 18.4% of pre-pandemic levels. As such, despite the still hawkish US and Europe central banks, the prevailing caution mode on the external risk may keep BNM accommodative to support domestic growth and liquidity. As such, we maintain our view that the local policy rate (OPR) is likely to be raised at best by 25bps in the event inflation rate were to inch.

Overall, with the US and Euro monetary rate hike seems to remain on track and seemingly unlikely to be reversed in 2023 unlike earlier market expectation, the lagged negative impact of protracted monetary tightening and the expected tightening credit conditions post recent banking fallout are expected to keep market risk averse or on cautious mode. Given the backdrop of growth risk, we continue to advocate the bond market to continue to perform positively though could likely trade range bound in the near term. The balanced/ bond funds remain a good risk diversifier instrument from equities in current market cycle. That aside, we continue our caution view on equity market as volatility remains and any market weakness in the near term will provide investment opportunity as the overall equity market will likely deliver positively in particular Asia market, benefiting from China economic recovery activities and stimulus measures. At PAMB, we have a range of well diversified funds to tap on from risky fund type like PRULink Equity Plus Fund, PRULink Dragon Peacock Fund and PRULink Asia Equity Fund, as well as the bond fund type like PRULink Bond Fund and balanced fund type like PRULink Managed Fund Plus Fund, PRULink Global Market Navigator and PRULink Asia Managed fund for your consideration.

Written by Esther Ong

 Esther Ong is the Investment Market Strategist of Prudential Assurance Malaysia Berhad (PAMB).Esther is a qualified Chartered Financial Analyst as well as having obtained MSc Investment Management and BSc Insurance & Investment with a Financial Markets Association of Malaysia (Persatuan Pasaran Kewangan Malaysia or PPKM) license.

This feature is to provide general information on the current situation of the economy with the information available at the given time. This feature does not constitute investment advice and cannot be used or substituted as such. The opinions of the author may not necessarily reflect the views of Prudential Assurance Malaysia Berhad.