Geopolitical tensions and rising oil prices are putting new pressure on Asian markets, which have experienced a correction phase in recent weeks. Since the start of the conflict with Iran at the end of February, several markets in the region have lost between 9% and 15% in US dollar terms, partly reflecting a “momentum unwinding” process, with hedge funds and tactical investors reducing exposure after previous strong gains.
The stock markets that had recorded the best performances in recent months have indeed also suffered the sharpest declines. In this context, the Hong Kong market showed greater resilience, with a drop of around 4%, while Chinese domestic shares – the so-called A-shares – recorded a much smaller decline, around 2%.
A key element to understand the dynamics of Asian markets at this stage is the trend in oil prices. Historically, levels above $80 per barrel have represented a negative factor for the region. In the last twenty years, there have been three significant episodes – in 2008, between 2011 and 2012, and in 2022 – where a sustained rise in oil above this threshold coincided with a decline in the Asia ex-Japan stock index. Furthermore, even when oil prices began to fall, Asian stock markets continued to correct for several months before stabilizing.
The current context shows several similarities with these previous phases. In addition to the increase in energy prices, the conflict in the Middle East is also causing disruptions in maritime trade routes. Many shipping companies are indeed changing their ships’ routes, lengthening transport times by about 10-15 days and increasing fuel costs up to around one million dollars per voyage. This phenomenon risks generating further inflationary pressures in the region and worsening the current account balances of several Asian countries, while simultaneously putting pressure on local currencies.
Some economies are particularly exposed to this scenario. Countries like India, Thailand, and the Philippines heavily depend on energy imports and are therefore more vulnerable to oil prices consistently above $80 per barrel. For this reason, many Asian currencies have shown signs of weakening since the beginning of the crisis.
China, however, has some characteristics that make it relatively more resilient at this stage. On one hand, the country has large strategic oil reserves that can help mitigate the impact of any energy shocks. On the other hand, the domestic A-share market is strongly driven by internal liquidity and participation from Chinese retail investors, making it less sensitive to changes in global sentiment compared to other Asian markets or shares listed in Hong Kong.
Looking ahead, much will depend on the evolution of geopolitical tensions and oil price trends. A rapid resolution of the conflict could lead to an equally rapid decline in energy prices and support a significant rebound in Asian markets. Otherwise, the environment could remain volatile for some time.
