Rising oil prices triggered by Middle East conflicts are driving a historic withdrawal of foreign capital from Asian emerging markets. International investors are persistently offloading stocks in Asian economies heavily reliant on energy imports, with the scale of outflows on track to reach the highest level in 15 years.
According to data compiled by Bloomberg, since the outbreak of the Iran conflict, foreign investors have sold approximately $52 billion worth of equities in Asian emerging markets (excluding China), positioning the region to record its highest monthly capital outflow since 2009. Markets such as South Korea and India, which depend significantly on crude oil imports, have borne the brunt of the selling pressure.
Last week, strategists at Morgan Stanley advised investors to reduce holdings during rebounds in Asian equities, citing persistent risks of oil supply disruptions in the region. Meanwhile, a stronger U.S. dollar and profit-taking in semiconductor stocks have further amplified the downturn in Asian markets. In contrast, U.S. equities have demonstrated relative resilience due to the country's status as a net energy exporter, leading to a noticeable divergence in performance between Chinese and American stock markets.
Prospects for a ceasefire between the U.S. and Iran remain uncertain. While U.S. officials maintain that negotiations are ongoing, Iran has publicly rejected President Trump's outreach efforts, leaving the timing of foreign capital's return to Asian markets highly unpredictable.
The magnitude of the sell-off has surpassed several historical benchmarks, underscoring the severity of the current shock.
Bloomberg data indicates that this month's foreign capital outflow from Asian emerging markets has not only exceeded the levels seen in March 2020, during the initial phase of the COVID-19 pandemic, but has also more than doubled the outflow recorded in June 2022 amid the Russia-Ukraine conflict.
Elevated oil prices have cast a shadow over the economic outlook of net energy importers, many of which are concentrated in Asia. South Korea and India, with their high dependence on external crude oil supplies, have experienced concentrated foreign selling, dragging down regional market performance.
Gary Tan, a portfolio manager at Allspring Global Investments, noted, "We may be witnessing a short-term rotation of funds into markets with lower exposure to Middle East energy risks, a trend likely to persist until the situation in Iran becomes clearer." He further emphasized that Asia accounts for about 80% of the crude oil demand passing through the Strait of Hormuz, "meaning any disruption would impact the region's inflation and growth prospects far more severely than other areas."
Asian markets have underperformed U.S. equities during this adjustment phase. As a net energy exporter, the U.S. economy is less vulnerable to oil price increases, providing a relative cushion for its stock market.
A strengthening U.S. dollar and profit-taking in chip-related stocks have added to the pressure on Asian markets. Morgan Stanley strategists, referencing these factors, recommended last week that investors sell into rallies in Asian equities, highlighting the region's heightened vulnerability to sustained oil supply disruptions.
The direction of the Iran situation remains the key variable determining whether foreign capital will return to Asia, with limited likelihood of a near-term resolution. While U.S. authorities insist diplomatic engagement continues, Iran's public rejection of Trump's ceasefire overture has stalled negotiation efforts. Gary Tan also suggested that the fund rotation trend is expected to continue until the geopolitical landscape becomes clearer, indicating that foreign investors' cautious stance toward Asian equities is unlikely to reverse significantly in the short term.
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