Diversifying for Resilience in a Shifting Economic Landscape

In March, global shares and bonds turned negative after earlier gains, largely due to the outbreak of conflict involving the US, Israel, and Iran. This pushed oil prices up sharply—by 58% in a single month and 91% since the start of the year. Shares were hit harder than bonds, mainly because investors worried about the risk of stagflation, which is when the economy slows down but prices keep rising. Bonds held up slightly better as concerns about slower growth gave them some support, despite expectations for higher inflation. Meanwhile, the US dollar strengthened by 2.7% over the month, while gold fell by 15%. The Malaysian ringgit also weakened, dropping by 2.6% against the US dollar to RM4.03 per dollar.

In March, stock markets around the world fell sharply, with global shares dropping by 8.5% and global bonds by 3.6%, both measured in US dollars. The biggest losses were seen outside the US: Europe fell by 9.9%, the UK by 7.9%, emerging markets by 10.8%, Japan by 11.8%, and Asia overall by 10.4%. The US and Singapore held up a bit better, with the US down 7.4% and Singapore down just 2%, as these markets tend to be more stable during turbulent times. Malaysia's market also performed relatively well, only dropping by 2.3%, partly because the country exports oil and the government provides subsidies to help keep fuel prices stable for consumers.

Although the losses in March offset earlier gains from January and February, the overall performance for the year was only slightly negative. Global shares fell by 4.8% since the start of the year, but this drop was softened by strong results in countries like Japan (up 3.1%), Korea (up 25.2%), Taiwan (up 12.3%), Singapore (up 5.3%), and Malaysia (up 0.4%). On the other hand, global bonds remained fairly steady, falling just 1.6% for the year, while Malaysia’s bond market hardly changed, with a return of minus 0.03%.

The market has been turbulent, mainly due to headlines about the ongoing conflict between the US, Israel, and Iran. When tensions rise or there’s no sign of meaningful negotiations, markets tend to fall. On the other hand, whenever the situation calms down, markets bounce back. However, constant military actions in the Middle East, Iran’s control over the vital Strait of Hormuz with only selective access, and mixed messages from the US and Iran about ceasefire talks have kept oil prices high and made investors cautious. The combination of expensive oil and persistent inflation has changed expectations about interest rates. Instead of expecting rates to go down, people now think rates will either stay the same or even go up. Currently, the US is not expected to cut interest rates, while the Eurozone is expected to make two or three reductions. Because of these shifts, returns on bonds have generally increased, especially for those that mature in less than ten years, which has resulted in a flatter difference between short- and long-term bond returns.

Meanwhile, global economic activity has slowed, although it remains in an expansionary phase. The main driver of growth has been manufacturing, supported by strong investment in artificial intelligence, low inventory levels, and increased production ahead of the expiry of the 10% reciprocal US tariff, which is only in effect for 150 days. Business expectations in Germany have dropped sharply, indicating weaker growth prospects. The German industrial sector was already facing difficulties due to US tariffs and the resulting uncertainty, as well as fierce competition from China. Being one of the most energy-intensive economies in Europe and traditionally dependent on energy imports, Germany is particularly vulnerable to the Iran conflict, which has caused gas prices to surge.

China’s stock market also dropped, but not as sharply falling by 4.6% during March and 3% since the start of the year. The country hasn’t been hit as hard by rising oil prices, because its economic growth, expected to be between 4.5% and 5% in 2026, is mostly being supported by government efforts to encourage people to spend more and to steady the housing market. China is also less exposed to risks from expensive oil thanks to falling prices within its own economy, a large supply of renewable energy, and plenty of oil reserves. However, like other countries, problems such as disruptions in shipping caused by the closure of the Strait of Hormuz, slower growth in trade, and lower business confidence are expected to weigh on economic growth around the world.

In Malaysia, the impact of the Iran conflict and rising oil prices is expected to be limited. While exports in February slowed to 10.8% year-on-year, the country’s economic growth is being supported by strong domestic consumption. This resilience is driven by various government investment initiatives, steady spending within the country, and a growing tourism sector.

Although oil prices are rising, this doesn’t mean prices at the petrol station will go up as well. Instead, the government is expected to spend more on subsidies—about 0.5% higher than before. According to Malaysia’s Finance Minister 2, as of 13 March, this extra spending amounts to around RM3.2 billion, based on current prices for RON95 petrol (RM3.27) and diesel (RM1.77). Because fuel prices are kept steady, the effect on inflation has been limited, although there could be some knock-on effects if expensive oil persists.

Inflation in February was low at 1.4%, which provides some protection if prices rise in the near future. For 2026, inflation is still expected to stay between 1.5% and 2%. The central bank, Bank Negara Malaysia (BNM), kept its key interest rate at 2.75% in early March, saying this was the right level, given low inflation and strong economic growth. However, BNM noted that there is increased uncertainty because of global politics and more unpredictable financial markets.

BNM usually tries to support growth, so it’s not expected to raise interest rates unless inflation is caused by increased demand, rather than just higher costs. Raising rates when oil and costs are already high could put extra pressure on both businesses and households—a “double squeeze.” Meanwhile, other central banks in places like the Eurozone, Australia, the UK, and Singapore are likely to raise rates due to higher inflation expectations. For this reason, Malaysia’s bond market is seen as a relatively safe place for foreign investors.

Market Outlook:

Bond Market Outlook

The bond market is expected to stay resilient, providing stability, underpinned by:

• Inflation should stay low, between 1.5% and 2.5%, despite higher than 1.4% in 2025

• Supportive monetary policy, with a bias toward easing or maintaining rates rather than tightening due to current oil price shock given any inflationary pressure is supply cost driven.

• Positive demand-supply dynamics, as fiscal deficit consolidation remains on track.

• Encouraging demand growth from both domestic and foreign investors.

Equity Market Outlook

The local stock market is likely to maintain its momentum, driven by:

• Both global and local economies are expected to stay strong, although there may be a short-term slowdown due to higher oil prices.

• Government policies and new investment projects, including those in the 13th Malaysian Plan, should support growth.

• Budget 2026 focuses on both responsible spending and improving social welfare.

• The economy is set to grow by 4%–4.5% in 2026, while keeping the budget deficit around 3.5%. Extra spending on fuel subsidies shouldn’t cause major issues since Malaysia is a net oil exporter.

• Company profits are improving, with further growth of 5%–10% expected in 2026.

• A weaker US dollar could attract more foreign investment, although recent global tensions have temporarily strengthened the dollar. The Malaysian ringgit remains strong.

Risks and Global Context

• Markets may dip in the short term as political tensions rise and shares are already expensive, with gains mainly in tech stocks.

• Global economic growth could slow to around 3% or less because people are spending less, jobs are weaker, and trade issues are getting worse.

• Higher oil prices, due to the ongoing conflict with Iran, are likely to keep energy costs up and slow down growth worldwide.

• If the conflict continues, it could lead to energy shortages and supply problems, raising the risk of both high inflation and slow growth.

• Company profits might fall because costs are higher and people are buying less.

• Inflation in the US might stay high for a while, which could delay interest rate cuts, but the long-term inflation target remains at 2%.

• Further escalation of geopolitical and tariff tensions.

Tailwinds and Opportunities

Policy support measures, such as fiscal stimulus, back-stop rate cut, robust AI-related capex and computing demand, and broadening of market drivers from mega AI theme to others, should provide market tailwinds. While volatility is likely amid economic uncertainties and geopolitical tensions, any market weakness could present attractive investment opportunities, given positive global growth and earnings outlook and low recession risk.

Investment Strategy:

Investment performance may vary by region, so a diversified investment strategy is recommended.

In view of the heightened geopolitical tensions and renewed tariff uncertainty, we maintain our stance advocating a balanced portfolio of 50-60% in equity funds and 40-50% in bond funds is recommended. For diversification, consider funds like PRULink Managed 2 Fund, PRULink Managed Plus Fund, and PRULink Strategic Managed Fund. For bond exposure to earn stable income and to diversify from equity risk, PRULink Bond Fund 2 is suggested, along with local and Asian equity exposure like 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.

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.