If the oil prices move higher it would be negative for Asian stocks, but if the ongoing conflict ends relatively quickly, any adverse impact on markets is likely to be short-lived, according to a report by Invesco.
The report highlighted that a prolonged increase in oil prices would weigh on equities, including those in Asia. Conversely, a swift resolution to the conflict could limit the damage to stock markets.
It said “A sustained move higher in oil prices would be negative for stocks, including Asian stocks”
While noting that geopolitical outcomes are impossible to predict, the report said sustained geopolitical tensions pose downside risks to Asia’s overall economy. If supply-side disruptions lead to prolonged oil price spikes, the region could face weaker growth and heightened macro-stability concerns.
Within Asia, Thailand, India, Korea and the Philippines were identified as the most vulnerable to higher oil prices due to their high import dependence. In contrast, Malaysia could be a relative beneficiary as it is an energy exporter. As a result, the Indian rupee and the Korean won are likely to face near-term headwinds.
It added that the duration and persistence of elevated oil prices would be the key determinant of the overall economic impact.
On inflation, the report stated that higher oil prices could increase upside risks to the inflation outlook for large energy importers such as Korea and Taiwan. However, it does not expect central banks in these economies to react aggressively, as policymakers are likely to downplay supply-driven inflation pressures.
The report emphasised that investors should closely monitor the duration of the conflict and the trajectory of oil prices. A sustained rise in oil prices would be negative for stocks, including Asian markets. However, if tensions ease quickly, the negative impact on equities is expected to be temporary.
Despite these risks, the report said that the broader macroeconomic backdrop for Asia remains supported by a robust semiconductor cycle, driven by AI-related capital expenditure. This strength is likely to partially offset any negative effects from higher oil prices.
Additionally, if growth in the region is adversely affected, the central banks are expected to respond by loosening monetary policy and increasing fiscal stimulus.
The report noted that Asian macro fundamentals remain sound and it does not anticipate any changes to GDP growth for the region this year.
