Ending 2025 on a High, Stepping Confidently into 2026

Both global stock and bond markets finished 2025 strongly. Worldwide, stocks rose 20.60% (measured in U.S. dollars), while stocks in Asia (not including Japan) climbed 29.73%, and China’s stocks increased by 17.66% (measured in Chinese yuan). Global bond prices also grew by 8.17% (in U.S. dollars). In comparison, Malaysia’s stock market didn’t do as well, rising just 2.59%, but bonds in Malaysia performed well with a 5.82% return. Even though Malaysian stocks lagged behind, the Malaysian Ringgit did well, strengthening about 10% to finish 2025 at 4.048 against the U.S. dollar.

As 2026 began, both global stocks and bonds kept rising in January, with global stocks up 2.91% and global bonds up 0.92% (both in U.S. dollars) for the year so far. This time, Malaysia and Asia (excluding Japan) did better than other regions, with Malaysia’s stock market up 4.07% (in Ringgit) and Asia ex-Japan up 6.30% (in U.S. dollars). The Malaysian Ringgit also continued to strengthen, gaining another 2.6% to reach 3.95 against the U.S. dollar.

The strong global equity market sentiment was broadly due to positive economic growth momentum stemming from both the manufacturing and services activity in the US and Europe despite earlier tariff angst, supportive US rate cut drivers from stable US unemployment rate and US inflation rate, and weaker USD trend driving capital flows to non-US market. The de-escalation of US-EU tensions following the diplomatic solutions pathway, also drove back risk on appetite where earlier the flare ups rattled market.

China’s stock market kept rising, up 1.66% so far this year. This happened even though China’s economy only grew a little, mainly because people spent less and the real estate market was weak. Still, investors are hopeful that China’s government will introduce more policies to help increase spending and boost the technology industry.

Malaysia’s economy performed better than expected, with growth in the last quarter of 2025 at 5.7% and the whole year at 4.9%. This improvement was broad and mainly due to stronger exports and growth in manufacturing, especially in electronics and food-related industries. Bank Negara Malaysia kept interest rates steady at 2.75% in January, noting that the country could see more growth thanks to higher tech spending, friendlier government policies, and more tourists. However, there are still risks from possible higher tariffs, ongoing global tensions, and unstable financial markets. Inflation is expected to stay moderate, with December’s rate slightly higher at 1.4%.

Together with the series of positive policy announcements in Jan 2026, ongoing implementation of strategic initiatives outlined in national master plans and weaker USD trend, Malaysia’s attractiveness for capital flows in the near term are reinforced and thus supporting local equity market to climb higher. The positive slew of policy announcements are such as Madani Government’s reform agenda to further uphold the policy stability and Malaysia’s economic growth prospects, New Investment Incentive Framework (NIIF) which will be fully rolled out for the manufacturing sector in the first quarter of 2026, and subsequently be extended to the services sector, and the unveiling of the Johor-Singapore Special Economic Zone (JS-SEZ) blueprint by the first quarter of 2026.

At the same time, yields on U.S. government bonds have increased slightly so far this year, as investors now expect a smaller cut in U.S. interest rates by the end of 2026. With the American economy doing well and inflation expected to stay low, interest rates in the U.S. are likely to remain unchanged for now. There is also some uncertainty in the market about who will be nominated as the next head of the U.S. central bank. Similarly, returns on Malaysian government bonds have moved up a little, especially for longer-term bonds.

Market Outlook:

Bond Market Outlook

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

Benign inflation expectations of 1.5%–2% despite higher than 1.4% in 2025
Supportive monetary policy, with a bias toward easing or maintaining rates rather than tightening.
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:

Resilient global and domestic macro-outlook.
Domestic supportive government policies, multiple investment initiatives and structural growth prospects as reinforced by 13^th Malaysian Plan.
Budget 2026 measures while aligning with fiscal consolidation targets, also reinforce social well-being and expansionary fiscal spending.
Projected 2026 GDP growth of 4-4.5%, while maintaining fiscal discipline with a targeted fiscal deficit of 3.5%.
Corporate earnings recovery, with recent results showing improvement and 2026 earnings growth expected at 5%–10% with upside potential.
Weaker USD trends drive potentially higher foreign inflows.

Risks and Global Context

Short-term pullbacks may occur as valuations are no longer cheap, gains are concentrated in tech sectors, and markets have been in an extended upcycle.
Global growth may slow to around 3% or lower due to consumption downshifting, weaker labour market and lingering trade drags as tariff impacts become more pronounced and pockets of tariff uncertainties prevail.
Corporate earnings could soften due to higher costs and softer consumption demand.
Inflation risks remain manageable, but U.S. inflation may stay elevated near term, potentially delaying rate cuts.
Increase in geopolitical and tariff tensions.

Tailwinds and Opportunities

Policy support measures, such as rate cuts, 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, 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.

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.