Middle East Tensions – Impact on Asia

Asia remains the most vulnerable region globally to sustained increases in oil prices due to its heavy reliance on imported energy and high trade openness. A prolonged geopolitical shock that disrupts Gulf exports could materially influence the region’s macro outlook.

While geopolitical outcomes are impossible to predict, we know that sustained geopolitical tensions pose downside risks to Asia’s overall economy.

If supply‑side disruptions trigger prolonged oil price spikes, the region may face weaker growth and heightened macro‑stability concerns. The duration and persistence of elevated oil prices will be the key determinant of the overall economic impact.

On the impact of higher oil prices, while I expect higher oil prices to increase the upside risk to the inflation outlook for large energy importers such as Korea and Taiwan, I do not expect these central banks to react to the potential inflation threat as they will likely downplay supply-driven inflation pressures.

Higher oil prices are a negative terms-of-trade shock for Asia, but with local fuel prices often regulated, the impact on growth and inflation should be manageable. Instead, a higher oil import bill is likely to place a higher fiscal burden on Asian budgets. 

Investment implications

In Asia, Thailand, India, Korea and the Philippines are the most vulnerable to higher oil prices, due to their high import dependence, while Malaysia would be a relative beneficiary since it is an energy exporter. Because of this, the Indian rupee and Korean won are likely to face near-term headwinds. 

The duration of the conflict and how oil prices move will be key to monitor for investors. A sustained move higher in oil prices would be negative for stocks, including Asian stocks. Conversely, if the conflict ends relatively quickly, any negative impact on stocks will likely be short-lived.

Regardless, what’s ultimately more important to the macro backdrop for Asia is the evolving semiconductor cycle, which I expect to continue to be robust this year driven by AI capex spending. This is likely to partially offset any negative impact from higher oil prices.

Additionally, if there’s any potential negative impact on growth for the region, I expect policymakers to loosen monetary policy and ramp up fiscal stimulus. Asian macro fundamentals are sound and I do not expect any changes to GDP growth for the region this year.

More so, I expect minimal impact on Asian equity markets and would view any downdraft as a potential buying opportunity. 

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.