Favourable Performance of the Bond Market

Both the global equity and bond market kickstarted 2023 with much optimism, reversing from the softness observed in December 2022. Bond market in general, had a better rally compared to the equity market in Jan 2023. Global equities MSCI AWCI(USD) Index +7.36% month on month (MoM) and local equities FBM 100 Index +1.38% MoM; and bond yields down (or bond prices up) sizably (10-year US government bond yield -36bps and Malaysia government bond yield -28.2ps MoM), resulting in Markit iBoxx ALBI Malaysia Non-Government index +2.32% MoM.

The outperformance of the bond market was due to the declining economic and inflation rate, leading to market expectation that further US Fed rate hike will be lesser up to 5% and below, instead of US Fed’s earlier guidance up to 5.25-5.50%. Besides, contrary to market expectations of a 25bps rate hike, BNM kept the policy rate unchanged in Jan 2023, citing growth risk concerns but remains open to further rate hikes as policy remains data dependent. As such, with market expectation of lesser tightening monetary policy or a pause, coupled with milder recession risk in the US and Eurozone, and potential strong recovery upside from China re-opening as Covid infection rate wanes; global equity market was broadly lifted. The equity market momentum was also boosted by equity re-positioning and short covering given earlier market pessimism. Nevertheless, the equity market lift was modest given overhanging concerns on corporate earnings guidance in view of margins squeeze and weak consumer demand following high inflation and high interest rates debt servicing; and China recovery phase will be bumpy and likely to be more evident in 2Q 2023. Meanwhile, consequential to the China recovery prospects lifting Asia from the expected negative impact of US and Euro trade demand, US dollar has also weakened relative to Asian currencies in general.

With equity market having delivered positively and reflected positive seasonal effect from Chinese New Year as expected; bond market having priced in high recession risk, subsequent lower interest rates and general fiscal consolidation; and MYR having strengthened correspondingly; we turned neutral on bond and equity market in the near term. The near term cautious is in view of the uncertainty arising from Malaysia’s Budget 2023 to be announced in February 2023, China re-opening recovery path and US Fed rate tightening path guidance. Nevertheless, we maintain our positive long-term outlook on bond market in 2023 as bond price will be well supported by the easing of monetary tightening policy, and the balanced/bond funds remain a good risk diversifier instrument from equities. Equity market will remain volatile but likely to deliver modestly given the government supportive monetary and fiscal policy despite the rising recession risk in US and Europe. 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.