Market Volatility and Investment Outlook in April
In April, both global and local stock markets experienced high volatility due to unexpected severe tariffs announced by the US on April 2nd - Liberation Day. Following this, global equity fell significantly for 3 days to a low of -14.3% Year to Date (“YTD”) before recovering towards the end of April to a loss of -1.7% YTD. Similarly, local equity also fell to a low of -14.7% YTD before recovering to a lesser loss of -7.3% YTD. In contrast, global bonds gained modestly by 2.8% Month on Month (“MoM”) to 5.4% YoY, although credit spreads widened. Local bonds also did well, gaining 1.2% MoM to 2.6% YTD, outperforming the 1-year local bank fixed deposit (FD) rate.
The primary reason for the market swing and subsequent recovery was the evolving US tariffs, which shifted from escalating momentum to a de-escalating one, with a 90-day pause on reciprocal tariffs until July 2nd. However, a 10% universal tariff is maintained on all countries except China. US tariffs on Chinese goods were raised significantly, and China retaliated with higher tariffs on US imports. The trade tensions between the US and China have increased the risk of a recession. The International Monetary Fund reported that these tariffs would negatively impact global economic growth, including the US, Eurozone, China, and Malaysia.
Concerns about the independence of the Federal Reserve Chairman caused a sell-off in the US Treasury market, but this was quickly eased. The Fed stated that any rate cuts would be data-dependent. The European Central Bank continued to cut rates due to growth and inflation concerns.
China started the year strong with good economic growth, driven by retail sales, industrial production, and fixed asset investment. However, tariffs present a downside risk. The government pledged to implement more proactive macro policies to cushion the impact of tariffs.
Malaysia's economy remained positive but slowed down. The latest GDP release showed moderate growth, with a decline in the mining and quarrying sector. March exports growth was encouraging, driven by shipments of Electrical & Electronics (E&E). March inflation remained low.
Malaysia's reciprocal tariff is the second lowest in ASEAN-10. The direct negative impact on Malaysia's growth ranges from 0.5% to 4.8%. The exemption of tariffs on semiconductors is a positive development for Malaysia's semiconductor and broader E&E sectors.
Market expectations of central bank rate cuts have increased due to slower growth and higher recessionary risk. The Fed may remain in a wait-and-see mode to assess the tariffs' progress and impact. The ECB is likely to continue cutting rates.
For Malaysia, Bank Negara Malaysia (BNM) is not likely to rush to cut rates but may do so if growth risk increases. The likelihood of a rate cut has increased as domestically oriented sectors soften and export-oriented sectors are expected to soften.
The USD could weaken or not likely to strengthen due to fears of US inflationary pressure, recession risks, and fiscal deficit concerns. The downside to Malaysia Ringgit and liquidity risk will be limited.
Bond Market Outlook: The bond market has performed well due to rate cut expectations. The outlook remains positive due to lower Malaysian Government Securities (MGS) supply, accommodative policy rate, global and domestic growth downgrades, rising recessionary risk, and more rate cut prospects globally.
Credit conditions are expected to remain stable due to the healthy banking industry, domestic growth drivers, and supportive local bond supply-demand dynamics.
Equity Market Outlook: The equity market turned negative. The outlook is neutral with a preference for local equity due to its defensive nature in the current risk aversion and market volatility.
The local equity investment thesis is supported by domestic growth drivers and low market valuation, but rising external demand risk dampens the outlook. Global equity markets are subject to earnings growth risk due to tariffs.
Further market recovery is subject to constructive trade negotiation, no tariff escalation post 90-day pause, aggressive rate cuts, extension of US tax cuts, and other economic stimulus.
Conclusion: The bond market outlook remains positive, while the equity market outlook is neutral with a cautious bias. A balanced portfolio of 50% - 60% in equity funds and 40% - 50% in bond funds, as well as dollar cost averaging, are recommended.
For investment diversification, PRULink Managed 2 Fund, PRULink Managed Plus Fund and PRULink Strategic Managed Fund are recommended. Alternatively, a mix of PRULink Bond Fund 2 (bond fund) with some local equity funds such as PRULink Equity Plus and PRULink Equity Income funds or Asia equity exposure such as PRULink Dragon Peacock Fund and PRULink Asia Equity Fund are suggested. While for global equity exposure, the 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.