Easing Towards Neutral

Post the strong positive market momentum kickstarting the year amid improving economic fundamentals, both the equity and bond markets eased off in February, in tandem with our general neutral view on markets earlier. Global equities MSCI AWCI(USD) Index -3.14% month on month (MoM) lowering gains to +3.74% YTD, while local equities FBM 100 Index -1.8% MoM with -1.17% YTD; and bond yields down (or bond prices up) sizably (10-year US government bond yield +43bps and Malaysia government bond yield +13bps MoM), resulting in Markit iBoxx ALBI Malaysia Non-Government index +0.02% MoM with +2.26% YTD.

The market consolidation observed was due to global headwinds, stemming largely from the developed markets’ more hawkish monetary policy guidance on the back of still robust job market and elevated inflation rate. Therefore, while the recent economic uptrend suggests a shallow recessionary economy, a more prolonged monetary tightening condition in the developed markets on the back of sticky inflation has increased stagflation risk. This latter risk is also reflected in the deep yield curve inversion, in view of the lag effect of the negative economic impact from the significant policy rate hike over a short period.

Meanwhile, Malaysia equity market performance was rather lacklustre YTD (FBM100 Index -1.17% YTD) due to the reallocation of foreign equity flows to China market as risk appetite increases and, local overhanging concerns on potential policy changes with the re-tabling of Malaysia Budget 2023 on 24th Feb. However, the Budget did not pose any negative market surprises. Instead, it is deemed relatively market neutral compared to the earlier tabled in Oct 2022 as the 2023 economic growth has been revised upwards to 4.5% from 4.2%, fiscal deficit revised downwards to 5% from 5.5% and development expenditure allocation revised upwards to about RM97bn from RM95bn to accelerate quality development projects. Nevertheless, the Budget is supportive of the Malaysia sovereign rating given the fiscal consolidation on track, underpinned by tax measures to reallocate disposable income to B40 and M50 and targeted subsidies in the plan. However, the consequential higher CPI for 2023 at 3.2%-3.8% is likely to justify for OPR rate hike by 25bps - 50bps to 3-3.25%.

Overall, while we were neutral on bond market earlier last month, we are more positive on bonds as yields climb higher on market jitters over the on-going monetary tightening path. We maintain our our positive long-term outlook on bond market as bond price will be well supported by the subsequent easing of monetary tightening policy, and the balanced / bond funds remain a good risk diversifier instrument from equities. That aside, we maintain our caution on equity market in the near term as volatility remains in view that earnings yet to trough with rate hike yet to pause and geopolitical risks yet to ease. Equity market will likely deliver modestly largely backed by China reopening activities and stimulus measures. At PAMB, we have a range of funds to tap market opportunities 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.