Is the Market No Longer ‘Buying Asia’? Why Asian Stocks Face Selloff Amid US-Iran Conflict While US Stocks Become a Safe Haven?

TradingKey - Emerging markets have shone this year: in addition to the South Korean KOSPI index, which surged as much as 40% at one point, Brazil's BVSP index has gained nearly 20% year-to-date, and South Africa's benchmark SAALL index has risen about 10%.

However, since the outbreak of the US-Iran conflict, the MSCI Asia Pacific Index has slumped 6% this week, a far greater decline than that of the S&P 500 over the same period, indicating that global capital is accelerating its return to the United States.

Has the "Sell US, Buy Asia" trading strategy, which was popular earlier this year, become obsolete? Will the US-Iran conflict completely reverse the strong rally in emerging markets seen in 2026?

Crude Oil Surges: Energy Import Dependency Weighs on Asian Equities

Analysts believe the primary reason for the pressure on Asian equities is the widespread dependence of Asian nations on Middle Eastern crude oil. Bloomberg Economics shows that China, India, and Indonesia are among the world's largest oil importers. According to Goldman Sachs estimates, every 20% increase in Brent crude prices drags down Asian corporate earnings by approximately 2%.

Furthermore, because rising oil prices are quickly reflected in the costs of products like gasoline and diesel—and energy consumption holds a high weighting in the Consumer Price Index (CPI)—higher oil prices directly push up headline inflation, thereby dealing a blow to Asian economies.

Alicia Garcia-Herrero, Chief Asia-Pacific Economist at Natixis SA, pointed out that Japan and South Korea, where oil pressure is particularly acute, will bear the brunt as more than 60% of their oil imports must pass through the Strait of Hormuz.

In contrast, the United States' direct reliance on Middle Eastern oil is quite limited. As the world's largest oil producer, U.S. daily crude output significantly exceeds that of traditional heavyweights Russia and Saudi Arabia. High production levels have mitigated the disruptions caused by supply fluctuations in the Middle East.

Additionally, the impact of this shock has extended beyond energy costs to sectors such as transportation, construction, finance, and defense. Consequently, shipping insurance premiums have soared, the costs of construction materials like aluminum and steel have risen, and expectations for defense orders have increased. These factors have had varying effects across different sectors of Asian markets.

Dollar Hegemony Returns, Shattering Asian Central Banks' Rate-Cut Hopes

In this conflict, the United States, benefiting from domestic oil self-sufficiency, has suffered less impact than oil-importing nations, demonstrating its economic resilience. This has strengthened the momentum for global capital to flow into the US dollar as a safe-haven asset, serving as the most direct cause of the greenback's strength.

The stronger dollar has suppressed local currencies across Asia: the Korean Won recently breached the 1,500 level against the dollar for the first time since 2009. The Japanese Yen, also a safe-haven asset, has seen its safe-haven appeal diminish due to excessive volatility following a nearly 5% decline over the past year. Coupled with amplified energy and inflation risks, the Yen fell further, hitting the 157 per dollar level.

Depreciating exchange rates have limited the scope for local central banks to cut rates. According to data compiled by Bloomberg, market expectations for cumulative interest rate hikes by the Bank of Korea over the next 12 months have been significantly revised upward from about 25 basis points to approximately 50 basis points. Furthermore, weakening local currencies are also weighing on corporate earnings forecasts.

Rajeev de Mello, Global Macro Portfolio Manager at Gama Asset Management, stated that the narrowing scope for monetary easing will dampen stock market sentiment, as the previously over-optimistic sentiment among investors regarding emerging markets begins to fade.

Has the "Buy Asia" Craze Come to an End?

Elfreda Jonker, Client Portfolio Manager at Alphinity Investment Management, pointed out that the current sharp pullbacks in Japanese and South Korean stock markets were not solely caused by energy concerns triggered by rising oil prices.

Year-to-date, the Nikkei 225 had risen 16% and Korean stocks had gained 40% before this recent slump. Jonker believes that because Asian equities saw significant gains earlier this year, resulting in high valuations and crowded positioning, they became more vulnerable when the shocks hit.

However, this decline does not represent a deterioration in fundamentals. After a correction of approximately 20% in the South Korean stock market, UBS upgraded its rating to "Attractive," citing expectations that South Korean semiconductor manufacturers will still achieve strong earnings growth. UBS stated that amid supply shortages, DRAM spot prices are expected to nearly double to $1.7 per Gb by the second half of 2027, supporting the earnings of semiconductor makers.