Standing Firm Against Global Contagion Risks

While the bond market generally chartered higher in March, the equity market exhibited high volatility. During the month global equity market rebounded on the expectations that central banks might not be as aggressive as before in rate hike. In fact, global equities MSCI AWCI(USD) Index rose 2.82% MoM, boosting gains to +6.84% YTD. On the other hand, local equities FBM 100 Index fell 1.53% MoM or losses of 2.93% YTD. As bond yields continued to be under pressure, the bond market gained with Markit iBoxx ALBI Malaysia Non-Government index up 0.61% MoM to 2.97% YTD (30-year US Treasury yield: -26bps MoM but 10-year MGS bond yield: unchanged).

The reason for a recent rebound in the global equity market is essentially due to expectations on key central banks turning less hawkish in monetary policy path amidst increasing growth and credit risks. The negative impact of sharp increase in US rates has become more evident as observed by the collapse of selective US regional banks (e.g. Silicon Valley Bank) due to liquidity crisis. Separately, Credit Suisse First Boston (“CSFB”) has also suffered capital risks resulting in complete write down of its Contingent Convertible bonds (“Additional Tier 1”) issued. While policy makers stepped in to contain the banking liquidity risks, these events have sparked market concerns of global banking contagion risks. As a result, the US Fed only raised rate by 25bps rate to 4.75-5% on 23 March, a lesser quantum than anticipated previously and the undertone of monetary path guidance has also turned dovish from hawkish though the expected terminal rate of 5-5.25% stay pat. With the dovish signal and the current absence of global banking contagion risk, market risk appetite picked towards the end of March. Aside the recent US/Europe banking turmoil event, both the reported global and local economic momentum remained steady though with some pockets of moderation. Similarly, China economic recovery continued to gain traction in March.

Meanwhile, the risk of global banking contagion risk spilling over to local banking industry is minimal given strong capital and liquidity ratios. Such is also reflected in the no negative impact on local banks’ credit rating. Besides, BNM also assured the market the ranking of AT1 bonds remains higher than equity holder in the event of financial crisis. Given the fallout in the US and Europe banking sector, the prevailing caution mode and moderating economic conditions may keep BNM accommodative to support growth and liquidity. As such, the OPR is likely to be raised at best by 25bps in the event inflation rate were to inch higher with the targeted subsidies approach.

Overall, the uncertainty of US monetary policy path has increased given the balancing act to contain the still elevated inflation rate and the financial liquidity risks. Meanwhile, the recent banking fallout is expected to further tighten credit conditions thus leading to higher credit spread. Thus, bond market having performed positively in March as advocated in February, could likely trade range bound in the near term. The balanced/bond funds remain a good risk diversifier instrument from equities in current market cycle. That aside, we continue from previous month our caution view on equity market as volatility remains in view of rising US recession risk, earnings yet to trough with rate hike yet to pause and geopolitical risks yet to ease. This is despite easing of global banking contagion risk. Nevertheless, market weakness in the near term will provide investment opportunity as the overall equity market will likely deliver positively in particular Asia market, benefiting from China economic recovery activities and stimulus measures. At PAMB, we have a range of well diversified funds to tap on 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.