Global Markets End October Strong Despite Early Weakness; Mixed Outlook Ahead

Despite weakness in early Oct, the global equity market unexpectedly ended the month strong, posting a +1.3% month-on-month (MoM) gain, and a +19.6% Year-To-Date (YTD) return (USD). The global bond market, however, closed slightly negative at -0.38% MoM, thought it still delivered a strong return of 7.6% YTD return. Meanwhile, Malaysia’s equity market declined -1.2% MoM, with a -4% YTD loss, while the local bond market yielding a positive 5% YTD return.

Markets reacted to mixed factors, including positive economic growth, slower US rate cuts, positive AI prospects, and easing US-China tariffs. The US and European economies continued to grow despite higher US tariffs, supported by strong services activity. The US government shutdown, now a month long, is expected to have only a temporary negative impact on US growth.

The US Federal Reserve (Fed) cut interest rates by 25 basis points to 3.75-4%, as expected. However, the unanimous decision and unexpected hawkish comments surprised markets negatively. The Fed indicated that the recent rate cuts were for risk management amid a soft job market and high inflation. Rate cuts may slow or pause in December, leading to higher bond yields and less risk appetite.

In the tech sector, AI-related stocks continued to rise on positive news momentum despite high valuations. Major US tech companies reported strong Q3 earnings, driven by investments in AI, cloud computing growth, and cost-cutting measures. Companies like Alphabet, Amazon, and Microsoft exceeded revenue expectations, while Meta and Apple posted mixed but resilient results.

China's growth prospects remain strong. In September, industrial production increased due to easing anti-involution policies, and exports rose, though domestic consumption, investment, and housing remained weak. To maintain its 4.5-5% growth target, the Chinese government is committed to boosting domestic consumption, supporting quality housing, and investing in high-quality development and technology self-reliance. A significant boost to market sentiment came from the de-escalation of US-China tariffs after a high-stakes meeting between Trump and Xi. Agreements included lowering average US tariffs to 47% from 57% with effective tariff rate cut to 32% from 42%; cooperation on fentanyl, agriculture trade and Nvidia/Tik Tok. Both sides agreed to a one-year truce on reciprocal tariff and export controls, including rare earth and port fees to finalise the trade agreement details, thus limiting the downside risks to economic growth for both US and China. Nevertheless, there remain other pending issues.

Malaysia’s equity market rebounded slightly at month-end, anticipatiing positive outcomes from the ASEAN summit, especially with Trump's visit. Both governments agreed to reduce non-tariff barriers, deepen regulatory alignment, and lower compliance costs for exporters. Malaysia's removal of export quotas on rare earth elements prioritises US investment in extraction and refining, supporting upstream diversification and NIMP 2030 objectives. Economic fundamentals remain encouraging, with gross export growth reversing higher to 12.2%, supported by record levels of shipped electrical and electronic products. Inflation edged up to 1.5% but remains benign. Limited rationalisation of petrol subsidies and current lower petrol prices will limit inflationary pressure, supporting BNM's current accommodative policy stance.

Market Outlook:

Investment performance may vary by region, so a diversified investment strategy is recommended. We are positive about the local stock and bond markets due to favourable economic factors and a strong Ringgit. The bond market is expected to remain strong, supported by lower supply and supportive monetary policies. The local stock market should maintain its momentum, aided by various domestic investment initiatives and the Budget 2026 reinforced support of expansionary fiscal spending with projected economic growth of 4.5% - 5% and social being while maintaining fiscal discipline to target fiscal deficit of 3.5%.

Nevertheless, there may be short-term market pullbacks due to high valuations and concentrated gains in the technology sector. Global growth may slow down as the impact of tariffs becomes more evident. Corporate earnings growth may ease due to higher costs. Inflation risks are manageable, but the US may see higher inflation near term due to tariffs, potentially causing a delay in the US’s rate cut plans.

Investment Strategy:

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, PRULink Bond Fund 2 is suggested, along with local and Asian equity funds like PRULink Equity Plus and PRULink Dragon Peacock Fund. For global equity exposure, PRULink Global Leaders Fund is 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.