Global and Malaysian Markets’ Robust Performance Amid Inflation Challenges
The strong equity market performance seen in April continued in May. Global equity market was up strong +4.06% MoM to 9.13% Year-to-Date (YTD), while Malaysia also rose steadily 2.56% MoM to 11.06% YTD in May. The positive equity market momentum was supported by broad-based acceleration in global growth with both the US and Eurozone economic activity climbed higher as well as surprising above market expectations, while China economic activity held steady. On the local front, Malaysia’s April industrial production was also reported to be better than expected at 2.4% YoY, and March loans grew healthily at 6% YoY. In addition to that, the largely positive 1Q corporate earnings delivery to date and robust prospective guidance on AI related business also drove the equity market optimism.
Nevertheless, such global economic resilience coupled with relatively higher commodity prices have kept inflation rate remained well elevated. Both US and Eurozone reported April inflation at 3.4% YoY and 2.4% YoY respectively were still above the respective long-term target. As such, while ECB rate cut expectation in June may likely remain on track given its inflation closer to target, as well as US has recently observed easing wage growth pressure and weaker consumer sentiment, there is increasing hawkishness among the Federal Reserve members where US rate cut frequency is likely down to one and there is also instead some willingness to raise rates if the trajectory of inflation moderation is at risk. Having said all that, as we move closer to 3Q 2024, where one US rate cut is likely to occur, bond yields traded range bound with global aggregate bond market recovered +1.53% MoM in May to -3.10% YTD.With Malaysia’s April inflation still low at 1.8% and BNM holding rates unchanged at 3%, Malaysia’s overall bond market also recovered by +0.90% MoM to 1.48% YTD.
Meanwhile, China’s economic activity has clearly bottomed out to date and remained in an expansionary phase, stemming from the manufacturing sector, given the policy stimulus measures. However, robust recovery path is unlikely in the near term as consumer spending remains poor due to the overhanging weak property market confidence despite various housing policy measures to stimulate demand and reduce supply.
Overall, having advocated to buy global equities on weakness in April and with market having recovered well in May recording high single digit return YTD, we expect global equities including Malaysia likely to consolidate near term before returning to its positive momentum. This is mainly because the increasing risk of “higher for longer” US rates has further threatened the US positive “soft landing” narrative that has underpinned the global equity risk appetite. Lastly, further local equity market strength could be capped in the near term as announcements of anticipated fiscal or private development projects, including their delivery progress, will be gradually unveiled for the remaining year. Target earnings delivery needs to be evident, China’s growth has yet to be in full swing, geopolitical risk remains overhanging and foreign capital inflows remains poor on the back of a weak MYR currency.
Within equities, we maintain our constructive preference for local equity market, including Asia, for better expected return relative to risk, while investment positioning in the local bond market remains for risk diversification and expected stable return. We maintain the key investment risks for 2024 to arise from inefficiency of local policy execution, sticky inflation rate, US higher rates for longer, and ballooning US – China trade tension with the impending November US election.
Given PAMB’s array of fund offerings with respect to geographical coverage and investment styles, PAMB funds can ride in tandem with the global market performance. Given our more positive outlook on Asia and the bond market, we prefer the PRULink Managed 2 Fund and PRULink Managed Plus Fund for investment diversification; the PRULink Equity Plus and PRULink Equity income for Malaysia exposure; and the Asia Growth Fund, PRULink Asia Equity Fund and PRULink Asia Managed Fund for Asia exposure.
*Return is as of 27/5/2024
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.