Global investors are poised to withdraw a record amount of capital from emerging Asian stock markets excluding China, as escalating Middle East conflicts drive up oil prices and cloud the region's economic prospects. Since the outbreak of hostilities in the Middle East, foreign investors have sold approximately $52 billion worth of Asian equities, putting the region on track for its largest monthly capital outflow since records began in 2009. Markets with high reliance on oil imports—such as Taiwan, South Korea, and India—have experienced the most significant outflows. Rising oil prices are exerting pressure on net energy-importing economies, many of which are located in Asia. This month's equity outflows have already surpassed those triggered by the pandemic in March 2020 and are more than double the outflows seen in June 2022, following the onset of the Russia-Ukraine conflict. According to Gary Tan, a portfolio manager at Allspring Global Investments, "We may see some short-term rotation into markets less affected by Middle East energy shocks, a trend that could persist until the situation becomes clearer. Asia accounts for about 80% of crude oil demand passing through the Strait of Hormuz, so any disruption there would disproportionately impact the region's inflation and growth outlook compared to other parts of the world." Asian equities have underperformed their U.S. counterparts this month amid mounting pressure. The relative resilience of U.S. markets, a net energy exporter, has been notable. A stronger U.S. dollar and profit-taking in semiconductor stocks have further weighed on Asian markets. Last week, Morgan Stanley strategists advised investors to sell during any rebound in Asian equities, citing the region's vulnerability to prolonged oil supply disruptions. Meanwhile, investors remain cautious regarding the prospect of a U.S.-Iran ceasefire. Although the U.S. has insisted that negotiations are ongoing, Iran's response has led many to adopt a wait-and-see approach.
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