Market and Investment

Waning Risk Appetites amid China Growth Concerns

After a strong month in July, both the global equities and bonds fell as the risk appetite waned amidst higher bond yields due to sticky inflation, and China’s growth concerns. Global equities fell -2.73% MoM (MSCI All Country World Index USD or MXWD Index), China -5.64% (Shenzhen CSI 300 Index) and Asia -6.03% (MSCI Asia ex Japan Index), while developed market (“DM”) bond yields higher (US Treasury yield up 15bps). While the DM bond yields traded higher, led by market adjustments that interest rates cut would likely be later in 2024, yields were off from high on softening labour market and business services activity.

Overall global economic growth has started to slow in 3Q, wherein US economic activity appears more resilient while Europe and China are largely weaker. Except for China facing deflation risk, prompting continued rate cuts (the most since 2000), the key common economic challenge DM central bankers face remains fighting against inflation - given the moderating inflation remains sticky and is still far above target rate while growth risk threat rises. While further rate hikes are data dependent, continued tightening would likely scale the recession risk, especially the tightening has been steep.

For China, following the July Politburo meeting, a series of stepped-up policy stimulus was swiftly issued to bolster consumer spending. Among the stimulus are to reduce rates, to stabilize housing market sentiment (relax first house definition, lower down-payment ratios and mortgage rates), boost capital market sentiment (lower stamp duty and lower minimum margin requirements) and support Yuan currency (lower reserve requirement for foreign currency deposits), as well as to elevate liquidity stress (accelerate local bond issuance and possible special bond refinancing programme) given the credit stress among the property developers, and selected trusts and funds. Nevertheless, consumer and private sector confidence recovery may take time.

For Malaysia, in line with our expectation, the local market performed better than the global market. Malaysia equity stable +0.18% MoM (FBM100 Index) and bond yields flat +0.45% (iBoxx ALBi Malaysia Non-Government Index). This is in view of the local's undemanding valuation, underperformance relative to global equities YTD (FBM100 Index -0.07% vs MXWD Index +13.62%), low foreign shareholding and subdued local political risk for now with the overhang of state election over and the current Unity Government remains intact.

The local market optimism is also underpinned by expectation that the government can now fully focus on policy implementation under the umbrella of the Madani Economy Framework, focusing on good governance, sustainable development, and racial harmony in the country. Thus, ensuing announcements in the coming months or in Budget 2025 are expected on the details of development plans to support the recent announced National Energy Transition Roadmap (NETR) in July and New Industrial Master Plan 2030 in August. Meanwhile, the local inflation rate reportedly fell to 2.5%, thus allowing BNM to maintain rates and remain growth supportive.

Going forward into the 2H2023, we remain optimistic on the local market in view of decent economic growth of 4-4.5% backed by the rollout of the sustainable development plan and higher tourism, inflation decline on track, and China’s economy likely bottoming out. On the external front, we are selectively positive on Asia as Asia transitions towards net zero emissions creating investment opportunities and China's economy likely bottoming out. We are more cautious on the global equities at large given the DM's softer growth and stretched valuations while liquidity tightening remains underway.

At PAMB, we have a range of well diversified funds to tap on. We prefer funds type like PRULink Equity Focus Fund, PRULink Equity Income Fund, PRULink Equity Plus Fund, PRULink Asia Equity Fund and PRULink Asia Great as well as the bond fund type like PRULink Bond Fund and balanced fund type like PRULink Managed Plus Fund and PRULink Asia Managed Fund.

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.