Concerns that conflict involving Iran could disrupt supply chains, particularly if oil flows through the Strait of Hormuz are not restored, are prompting Morgan Stanley to adopt a more cautious stance on Asian equities and reduce its exposure to India. Strategists at the firm, including Daniel Blake and Jonathan Garner, wrote in a March 5th report that they are maintaining a defensive position. They noted that Asia remains heavily dependent on crude oil, refined products, and liquefied natural gas (LNG) supplies from the Middle East, and they believe the market is overly optimistic about supply chain risks. As part of their latest adjustments, the strategists downgraded India from "Overweight" to "Equal-weight," identifying it as one of the Asian markets most vulnerable to potential disruptions in LNG supplies from Qatar. They suggested that, given uncertainties and high valuations in the AI sector, global investors might adopt a wait-and-see approach, potentially waiting for the tech cycle in South Korea and Taiwan, China, to peak before reconsidering investments in India. This shift by Morgan Stanley underscores the rising geopolitical risks as the conflict reshapes energy flows and risk premiums. A prolonged disruption of the Strait of Hormuz could drive up prices for oil and LNG, putting pressure on energy-import-dependent Asian economies and triggering downward revisions to earnings forecasts. There is growing market concern that persistent supply shocks could lead to a global economic slowdown, thereby weakening crucial export industries. Global investors are pulling capital from major markets in emerging Asia. Since the conflict began, foreign investors have withdrawn approximately $1.3 billion from India, a market with relatively limited exposure to AI-related sectors. Concurrently, larger outflows have been observed in Taiwan, China, and South Korea, which are centered on the chip industry—this week seeing outflows of about $7.9 billion and $1.6 billion, respectively.
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