Why are Asian markets shrugging off energy fears?

There is an old story about a frog, a pot that is slowly heating up, and a lesson about failing to anticipate dangers until it is too late.

By conventional economic logic, with the US-Iran conflict choking up energy flows, Asian markets should have sunk lower. The region is, after all, the most exposed: nearly 80 per cent to 90 per cent of oil and gas flowing through the Strait of Hormuz is destined for Asia, and for many economies, Middle Eastern supply accounts for 40 per cent to 80 per cent of crude imports.

Yet, markets have done the opposite. Risk assets have rallied, with MSCI Asia ex-Japan up around 12 per cent year to date, while the S&P 500 has traded to new highs.

What explains this resilience while the strait remains shut? Is it “boiling frog” naivete about imminent danger, or efficient markets pricing in information as they should? More importantly, how should investors manage their portfolios ahead?

The reality is the current US-Iran ceasefire has been a major reprieve, but far from an all-clear for markets. It strengthens the base case of continued growth and expanding earnings, which support risk assets. Yet, the clock is also ticking on the real economy and by extension, the risk rally. Here is why.

For one thing, gaps in demand remain wide. Disagreements persist over the possibility of an Iranian toll, its nuclear programme, the lifting of US sanctions, and the fate of Iranian proxies in the region. A durable regional security structure remains elusive, with a mix of compromise and can-kicking solutions likely for now.

In our base case of a bumpy resolution, oil flows gradually return to pre-crisis levels in the second half of 2026, and prices stabilise towards more manageable levels, potentially easing towards US$90 per barrel by the year end. Globally, solid consumer spending, labour markets, and AI-driven investments continue to underpin growth and profitability.

The growth-inflation mix could worsen but should not meaningfully derail the big picture, which remains benign and resilient. Importantly, the risk rally continues, global earnings rise in the low-teens and the S&P 500 index ends the year around 7,500.

But if the strait remains shut and oil does not flow for another three to six months, the dynamics change materially. The price shock would evolve into outright physical shortages.

Inventories would draw down, pressuring industrial production. Brent prices could spike towards US$150 or even US$200. A downside scenario would see the global economic fallout accumulating rapidly, with equities selling off. Bonds would also fall initially, but then rally as growth cracks and the extent of demand destruction becomes clear.

In Asia, its resilience partly reflects better preparedness versus past energy disruptions. For instance, its energy reality is far more diversified today. Strategic stockpiles (about three to six months’ worth), along with diversified sourcing, and targeted fiscal responses have softened immediate shocks.

While South and South-east Asian economies – Indonesia, Thailand, as well as India and Pakistan – are far more vulnerable due to limited reserves and less fiscal space, these economies still have access to alternate sources of oil, such as Russia, and are selectively rationing fuel.

Meanwhile, secular trends such as the AI investment boom are shoring up a powerful tailwind. March trade data was unequivocally strong regionally, with explosive semiconductor growth and improving breadth across electronics segments.

The Iran war is accelerating consumer adoption of green tech. Electric vehicle and solar panel sales have surged in recent weeks, while greater state investment in electrification will benefit regional players holding dominant positions in green supply chains.

Moreover, most Asian economies entered the conflict from a position of macroeconomic strength, poised for a strong growth trajectory. Purchasing managers’ indexes and current account balances have only modestly deteriorated, and external buffers remain robust. The US Federal Reserve could still cut rates once or twice towards the year end, and together with a softening US dollar, should remain supportive for Asia’s markets.

Altogether, the ongoing AI surge and “value up” momentum should fuel a 36 per cent year-over-year increase in MSCI Asia ex-Japan earnings in 2026, versus 11 per cent for MSCI ACWI in our base case. Regional earnings expectations have risen since the start of the Middle East conflict while investor positioning has also reset earlier in 2026, with significant outflows from emerging Asia creating room for rapid rebounds as sentiment stabilised.

Put together, these factors explain why Asian markets have been able to look through the current conflict.

But the margin of error is also narrowing. The longer the conflict persists, the harder it is to contain the jump risks into a bear case outcome for inflation, growth, and corporate profitability.

The lesson: markets are conditional, rather than complacent.

For investors, stay invested but alert.

Our investment game plan remains – maintain a robust liquidity strategy to avoid forced selling; ensure effective diversification across equities, bonds, and commodities; add hedges; and de-risk progressively if the war drags on.

In equities, we continue to favour diversified exposures – in the US, equal-weighted indexes should outperform market-cap-weighted ones. Outside the US, we like emerging markets and the Asia-Pacific markets: Asia ex-Japan, Japan, and Australia.

In tech, avoid concentration risk amid rising AI competition. We like the leading Asian “picks and shovels” of the AI capex boom, especially semiconductors and hardware names in Taiwan and Japan, but imminent peaking of DRAM pricing momentum could pressure South Korean memory trades after the strong rally.

In China, hard tech is rallying, but further signs of AI-driven cloud profit improvement are needed to re-rate the dominant internet sector. Meanwhile, the rally in China industrial metals, power equipment, and healthcare should continue, while green opportunities are also reviving.

Additionally, build in resilience through quality bonds and hedges. The US dollar should soften against Asian currencies – especially the Australian dollar, Singapore dollar, and Chinese renminbi – as risk sentiment improves. Gold stays a preferred portfolio hedge.

As the heat rises, it pays to keep one’s eye on the clock, and take decisive action should the time call for it.