Market Review & Outlook on US Tariff
On 2nd April, Liberation Day, the US imposed large tariffs aimed at eliminating bilateral US merchandise trade deficits. This would be the largest tax increase since 1968, raising about USD400bn or 1.3% of GDP.
The US average effective tariff rate is estimated to increase by about 20-25%. Key US trading partners’ cumulative tariffs are as follows: China (54%), Euro (20%), Canada (25%) and Mexico (25%). Additionally, other goods tariffs include the removal of duty-free de minimis treatment for parcels valued at USD800, 25% tariffs on selected 5 sectors (steel and aluminum, autos, chips, lumper, pharmaceutical) and 25% tariffs on non-USMCA goods.
Following the 2nd April tariff announcement, the global equity market fell (from 28/3/2025 to 8/4/2025 period, global equity down -10.5%, US down -10.7% and Malaysia down -5.9%) while the bond market rose (global bond up +0.2%, Malysia bonds up +0.9%).
Subsequently, on 10th April, US announced a 90-day pause on higher tariffs that hit dozens of trade partners but raised tariffs on China to 125% while China reciprocal tariff on US rose to 84%. As such, the market had a relief rally, narrowing the recent losses.
Based on the IMF model, the tariff shock could reduce US GDP by 2% (to flat from the earlier consensus of 2.2%) and global growth by 1% (to 2% from 3%). Recessionary risk has increased from 40% to 60%. The prospects of retaliation (including trade restrictions that could severely impact supply chains and production) are poised to worsen the downside risk, potentially leading to a global recession in 2H2025 or 2026.However, the prospects of constructive negotiation could cushion the risk.
For Malysia, the reciprocal tariff of 24% is the second lowest in ASEAN-10, lower than average rate of 33%. Some goods are exempted (copper, lumber, chips etc). The Malaysian government has commented that it will not consider retaliatory tariffs and will actively engage with the US on the tariff measures. The estimated direct negative impact on Malaysia’s growth ranges from 0.5%-0.7% to 4.3%-4.8% (Earlier BNM March projected growth was 4.5%-5.5%). There remains growth risk from 1) the indirect negative impact, given 38% of Malaysia’s GDP is driven by external demand; and 2) the thesis of being a beneficiary of China +1 is unlikely. Among the Asean-6 GDP, the biggest negative impact on growth would be Vietnam and Cambodia, given worst tariffs 46% -49%.
Given slower growth and higher recessionary risk, market expectations of Developed Market central bank rate cuts have increased. The market currently expects US Fed rate cuts to increase to 75bps (3.5%-3.75%) from 25-50bps in 2025 and another 50-75bps rate cuts (2.75%-3.25%) in 2026.
For Malaysia, BNM is not likely to rush to cut rates, given the current balanced risks of growth and inflation. Nevertheless, BNM could cut rates by 25bps to 2.75% in 2H2025 if growth risk increases, given BNM’s earlier March annual report highlighted growth risks taking precedence over inflation risk. The likelihood of BNM rate cut has increased as domestically oriented sectors soften and export-oriented sectors are expected to soften in the coming months.
Bond market outlook
YTD bond market turned positive (Malaysia 2.04%, Global 4.2%). Shorter tenure of bond yields shifted lower more (MGS -20bps, UST -70bps) on rate cut expectations.
We maintain a positive bond market outlook. The earlier investment thesis (lower MGS supply on lower deficit and OPR kept at 3%) is further reinforced by current global and domestic growth downgrades, rising recessionary risk, more rate cut prospects globally, including a possibey BNM cut of 25bps, and risk aversion.
Meanwhile, credit conditions are expected to remain stable given the healthy banking industry, domestic growth drivers remain intact and local bond supply-demand dynamics remain supportive. Liquidity risk is limited currently but needs to be monitored. While credit spreads may rise as they have earlier tightened to low levels, the absolute yields remain resilient.
Equity market outlook
YTD equity market turned negative (Malaysia -12%, Global - 9%).
We downgrade the equity market outlook to neutral from positive but maintain a preference for local equity. Local equity is deemed a defensive market relative to global markets in the current risk aversion and market volatility.
The local equity investment thesis is supported by domestic growth drivers and low market valuation, but the rising external demand risk dampens the outlook.
Given the market has fallen significantly near term, a short-term rebound from over pessimism is possible. Market rebound could stem from tariff de-escalation, aggressive rate cuts, extension of US tax cuts and other economic stimulus.
Conclusion
In summary, while the positive bond market outlook remains, the equity market outlook has been downgraded. Given market volatility likely to persist, while possibly equity market rebound from pessimism on policy measures, as advocated earlier since the start of 2025, 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, the PRULink Managed 2 Fund, PRULink Managed Plus Fund and PRULink Strategic Managed Fund are recommended. For Malaysia exposure, PRULink Bond Fund 2 (bond exposure), the PRULink Equity Plus and PRULink Equity Income funds (equity exposure) are suggested. For Asia equity exposure, the PRULink Dragon Peacock Fund, PRULink Asia Equity Fund, and PRULink Asia Managed Fund are preferred. 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.