February 2026, Seizing Opportunity Amid Uncertainty: Malaysia’s 2026 Investment Playbook

Both global shares and government bonds continued to rise for the second month in February. Shares worldwide increased by 1.65% and bonds by 0.81% compared to last month, measured in U.S. dollars. So far this year, shares are up by 4.61% and bonds by 1.75%. The countries that performed the best in February were outside the U.S., including the UK (up 6.63%), Europe (up 4.04%), Asia (up 7.15%), and emerging markets (up 6.97%). Within Asia, countries with strong gains included Korea (up 15.35%), Thailand (up 16.30%), Taiwan (up 5.14%), and Japan (up 7.46%).

The strong global equity market sentiment continues to be driven by the positive global economic growth momentum, stemming from both the manufacturing and services activity, with US and Europe continuing to be in expansionary growth phase despite earlier tariff angst. Meanwhile, market expectations of US rate cut with the nomination of Kevin Warsh as the next Fed Chairman by Trump, are supportive of weaker USD trend narrative, leading to stronger non-US market performance YTD.  

Despite expectations that the US dollar would weaken, the timing of a US interest rate cut remains uncertain. This is largely because the US unemployment rate fell to 4.3% in Januaryuary and inflation eased to 2.4%. The softer inflation figures suggest that the impact of tariffs and a weaker dollar on prices have not yet fully materialised, as companies have likely absorbed some of the increased costs of goods themselves.

Nevertheless, the notable market headwind this month was on a decline in the US technology  sector led by the decline in US software sector on concerns that  AI may replace software, following Anthropic’s launch of new enterprise-grade AI tools, as well as the market resetting of valuations given the backdrop of market cautiousness on high valuations, and the Fed pausing rates cut in the near term.

Meanwhile, the US Supreme Court has ruled against Trump’s tariff policy. Although Trump imposed a 10% tariff on certain affected items in response to reciprocal measures, this tariff will only be in place for 150 days. Tariffs on other sectors are even more severe. While these ongoing trade and tariff uncertainties have led to some market volatility, the overall outlook for growth and inflation remains intact.

China’s stock market showed only modest gains, rising by 0.66% so far this year. This muted performance was largely due to a slowdown in China’s economic momentum, with manufacturing activity weakening across both supply and demand, and non-manufacturing sectors such as construction and real estate also remaining subdued. Investors remain optimistic, however, that the Chinese government will introduce further policies to stimulate consumer spending and support the technology sector. Economic growth for 2026 is forecast at 4.7%, which is close to the government’s target of around 5%.

Malaysia’s economy outperformed expectations, with growth of 6.3% in the last quarter of 2025 and 5.2% for the whole year. This improvement was broadly due to stronger exports and growth in manufacturing,  specifically in electronics and food-related industries. January CPI remains stable  at 1.6%, allowing  Bank Negara Malaysia to maintain interest rates at 2.75%. However, there are still potential risks from higher tariffs, ongoing global tensions, and unstable financial markets. Inflation is expected to be higher but will stay moderate, thus supporting accommodative policy rate.

Thanks to a series of positive policy announcements in January 2026, ongoing implementation of strategic initiatives, and the weakened US dollar, Malaysia is set to become increasingly attractive for capital inflows in the near term. This helps to boost the local equity market. The slew of positive policy announcements from the Mandani Government reform agenda have enhanced Malaysia’s economic outlook. The inclusion of the New Investment Incentive Framework (NIIF), set to be fully implemented for the manufacturing sector in the first quarter of 2026, then later extended to the services sector. alongside the unveiling of the Johor-Singapore Special Economic Zone (JS-SEZ) blueprint, also planned to be released within the first quarter of this year.  Several positive policy announcements have enhanced Malaysia’s outlook. These include the Madani Government’s reform agenda, which aims to strengthen policy stability and boost economic growth; the New Investment Incentive Framework (NIIF), set to be fully implemented for the manufacturing sector in the first quarter of 2026 and later extended to the services sector; and the unveiling of the Johor-Singapore Special Economic Zone (JS-SEZ) blueprint, also planned for release in the first quarter of 2026.

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 being 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 recover, 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, strong capital expenditure linked to artificial intelligence, and rising demand for computing , 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 risk.

Investment Strategy:

Investment performance may vary by region, so adopting a well-diversified strategy is recommended to optimise performance and manage risk effectively.

In view of the heightened geopolitical tensions and renewed tariff uncertainty, we maintain our stance advocating 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.