Since the US-Iran ceasefire announcement, conflicting signals from both countries have unsettled markets. However, markets now appear to have moved past the ‘peak fear’ stage. US equities have not only retraced the losses sustained since the Middle East conflict began but have also scaled new highs. While this vindicates our Overweight allocations to equities, Asia ex-Japan (AxJ) equities – another geography we favour – still trade below pre-crisis levels.

I’d argue that such a divergence in performance is not a reflection of deteriorating corporate fundamentals in Asia, but rather a rational – albeit now moderated – repricing of energy vulnerability. Unlike the US, which has become a net energy exporter thanks to its shale revolution, Asia remains structurally dependent on imported oil and gas. The situation in the Strait of Hormuz – a chokepoint for one-fifth of global oil shipments – has cast a long shadow over regional input costs and fiscal balances.

Despite the ceasefire, the US naval blockade and Iran’s refusal to allow safe passage have caused oil prices to remain stickier than pre-crisis levels, hovering in the USD 80-90 range. This ‘energy premium’ has been a millstone around the neck of AxJ equities. Furthermore, it explains why Europe and Japan have underperformed the US even more, owing to their heavier dependence on imported energy.

A softening greenback amid the rocky path to
resolution

We expect the diplomatic journey from ceasefire to a formal agreement between the countries to be bumpy, but we view re-negotiation as more likely than re-escalation. Given the peak fear has passed, the narrative will likely gradually shift from supply chain panic to sentiment normalisation.

While uncertainties linger – not the least of which include Iran’s nuclear posture and the multi-year timeline for repairing the region’s damaged energy infrastructure – the market’s primary fear of a persistent blockade has subsided. The expected easing of tensions should help soften the US dollar, which could act as a powerful counterweight to high oil prices for Asian importers. We forecast the US Dollar Index to retreat towards 96, providing breathing room for Asian central banks and alleviating imported inflation pressures.

Unpacking Asia’s catch-up potential

Another reason to revisit Asia is its appealing valuation and growth. The valuation discount at which AxJ equities trade relative to global benchmarks has stretched to levels not seen in two decades. This is particularly remarkable when juxtaposed with the region’s earnings trajectory. Unlike previous cycles where underperformance was linked to weak corporate governance or faltering growth, the current discount exists alongside decent double-digit earnings growth in key markets such as China, Taiwan and India. On top of policy support that bolsters the resilience of domestically oriented sectors, artificial intelligence provides a structural growth force undeterred by the conflict.

Why quality wins in Asian stock investing

The current backdrop calls for a nuanced, quality-focused approach. Given oil prices will likely remain elevated – with upside risk to near-term inflation prints – we suggest a disciplined investment strategy. This involves steering clear of sectors sensitive to high energy input costs, such as airlines, shipping and logistics. We would add companies with favourable product mixes, product leadership and pricing power, as they are capable of passing through costs and maintaining margins. We also favour companies committed to shareholder returns via share buybacks and dividends. Investing in these quality stocks allows portfolios to counter inflationary pressures.

Opportunities in Asian bonds and currencies

Beyond equities, the easing of Middle East tensions reopens a compelling window for Asian fixed income. Emerging Market (EM) USD bonds have underperformed their Developed Market counterparts, largely due to concerns over fiscal strain from fuel subsidies – a burden that now looks set to ease. Apart from the attractive carry, the softening US dollar provides an incremental tailwind for EM local currency bonds. Within Asia, China and Malaysia have exhibited resiliency in their currencies, rising over 2% against the US dollar so far this year due to their lower reliance on imported energy.

All in all, we maintain a tactical Overweight on EM bonds and AxJ equities, with a tilt towards quality, technology and policy beneficiaries. Despite the US-Iran ceasefire, the world remains fraught with geopolitical uncertainty. Having a globally diversified foundation portfolio with Overweight allocations to gold and equities should help mitigate geopolitical and inflationary risks.