Global brokerage firm Morgan Stanley has turned cautious on Asian equities, downgrading India as the escalating conflict between the US and Iran raises the risk of disruptions to energy supplies and global trade routes.
In its latest regional portfolio reshuffle, the brokerage cut India’s rating to “equal-weight”, warning that Asian markets remain heavily dependent on oil and gas supplies from the Middle East. Prolonged disruptions could trigger capital outflows, higher energy costs and pressure on corporate earnings across the region.
Morgan Stanley also downgraded the United Arab Emirates, while upgrading Taiwan and Saudi Arabia.
The brokerage said the conflict has significantly increased risks around the Strait of Hormuz, one of the world’s most critical energy chokepoints.
Nearly 20 percent of global oil shipments pass through the strait, along with more than 40 percent of India’s crude imports. Any prolonged disruption could push up crude oil and liquefied natural gas (LNG) prices, hurting energy-importing economies such as India.
Morgan Stanley strategists said Asian markets may be underestimating the scale of the risk. The strategists wrote on March 5: “Asia remains critically dependent on Middle Eastern supply of crude oil, refined products and LNG, and we believe the market is too complacent about supply chain risks.”
The brokerage also noted that India could be particularly vulnerable to disruptions in liquefied natural gas shipments from Qatar, one of its key suppliers.
The rising geopolitical risk has already triggered significant capital outflows from Asian markets.
According to Bloomberg data cited in the report:
Foreign investors have pulled about $1.3 billion from Indian equities since the conflict began
Taiwan has seen nearly $7.9 billion in outflows this week, putting it on track for its biggest weekly foreign investor exit
South Korea has recorded withdrawals of around $1.6 billion
The brokerage warned that sustained energy disruptions could push oil and LNG prices sharply higher, potentially slowing global economic growth and weakening export-driven industries across Asia.
Morgan Stanley said global investors may remain cautious on India in the near term because of relatively high valuations and uncertainty surrounding the global technology cycle.
The brokerage suggested that investors may wait until the technology cycle in markets such as Taiwan and South Korea peaks before reallocating more capital to India.
(By arrangement with livemint.com)