FAQs on U.S.-Iran conflict

Taking stock of the current Middle East situation

Q: How are we thinking about the current Middle East situation?

The U.S.-Iran war has lasted for over a week now, and there is still no visibility on how or when it will end. The situation is fluid, but we see a number of factors that could limit the duration of this conflict. Our base case is that this remains primarily a geopolitical event rather than an economic one—meaning disruptions are likely measured in weeks rather than months. The Brent futures curves also suggest the market is not currently pricing in a prolonged impact of higher oil prices (Exhibit 1). Key variables to watch include munitions inventory and U.S. political considerations ahead of midterm elections, where voter sensitivity to living costs will be front and center.

Q: What is the oil price risk here? 

Since the conflict began, Brent crude oil prices surged, nearly breaching USD120 per barrel on Monday (March 9), the highest since mid-2022 (Exhibit 2). In recent days, oil prices have retreated amidst news of a potential resolution. This sharp rise in energy prices arguably has fueled worries over stagflation (high inflation with weaker growth). Naturally, the duration of this spike is the key. In 2022, Russia's invasion of Ukraine kept oil price above USD100 per barrel for about six months, which contributed to higher inflation, combined with global recovery from the pandemic, which resulted in the broad-sell off across both public equities and fixed income. 

Q: How long will this last? 

The surge in energy prices and the correction in markets could constrain on how long this confrontation could continue from Washington's perspective. The key determinants in our view that could drive the length of the conflict are munitions, markets and the mid-terms. Events over the past year showed that the Trump administration is sensitive towards market volatilities and public sentiment, particularly around the financial costs around defense and fuel prices. This is particularly important as we approach the start of campaign season for the mid-term elections in November. Thus far, the U.S. administration has been vague in what its objectives are in striking Iran, which makes tracking the future path of military action more challenging. Yet, this also offers the administration some flexibility to declare victory and pull back on military actions. 

Significance of the Strait of Hormuz

Q: Why is the Strait of Hormuz so pivotal right now?

Although Iran accounts for roughly 4% of global crude and Organization of the Petroleum Exporting Countries+ (OPEC+) likely has spare capacity to cover moderate shortfalls (see right chart of Exhibit 3), the Strait of Hormuz is a major chokepoint for energy flows and any potential closure could affect 38% of global seaborne crude, 20% of global crude oil supply, 17% of global liquefied natural gas (LNG), 3.5% of container volumes and 2% of dry bulk (Exhibit 4). Many Asian economies (e.g., China, South Korea, Japan, India) rely on energy transiting through the Strait of Hormuz, though strategic reserves can buffer short-lived disruptions. South Korea and Japan have over six months of reserve while Taiwan has three to five months. China’s reserve is around one to two months. In the case of any oil shipment suspension from the Strait of Hormuz that lasts for weeks or months, China will probably have to fall back on alternative oil sources in the short term, and rely more on its coal reserves as well as developing sustainable energy in the medium term. A prolonged disruption may also affect technology supply chains due to the energy needed for data centers and chemicals used in semiconductors and memory. Asian governments are already deploying fiscal policies, such as capping fuel prices, to help ease the pressure on businesses and consumers, naturally raising fiscal deficits.

Hence the choking point of Hormuz Strait shipment will likely threaten to disrupt trade, push up shipping costs and insurance premium, as well as to test the supply chain of LNG and petrochemicals (Exhibit 5 & 6). Meanwhile, the disruption to shipping in the Strait of Hormuz is now also putting serious strain on oil storage capacity in the Gulf. As Hormuz shipping flows remain severely restricted, this forces production shut-ins as storage fills. Iraq has cut output sharply, while the United Arab Emirates and Saudi Arabia are managing or reducing production amid limited bypass capacity. Even with de-escalation, restoring full output will likely take several weeks. 

APAC impact 

Q: What is the impact from higher oil prices?

If higher oil prices persist, most Asian economies will likely witness downward pressure on growth through terms of trade losses, along with higher inflation. In 2025, net oil and petroleum imports averaged only 2.0% of GDP across Asia. Also, energy takes up a modest share in Asia's Consumer Price Index (CPI) basket. Hence, unless oil shock turns out to be more than a transitory shock, we expect limited impact on growth and inflation for Asian economies. But the two main channels of transmission from oil prices to the economy are inflation and trade balances.

• Inflation: On inflation, we estimate roughly 0.2 percentage points of headline CPI impact across Asia for each USD10/bbl increase in crude oil prices. Given the tight linkage between food and oil prices, an increase in crude oil prices could affect countries such as India, Indonesia, Philippines and Thailand, relatively more than its regional peers given the higher weight of food and energy in their CPI basket. Developed Asian economies, such as Japan, Singapore and South Korea are expected to see more modest impact.
• Trade balances: Almost all markets in the region are likely to see a deterioration in their current account balances, particularly those that are highly dependent on imported energy like oil, petroleum and gas (e.g. Thailand, Korea, Singapore and Taiwan). (Exhibit 7) 

Policy response 

Q: How will policymakers respond to the higher oil prices?

Fiscal policy will likely be the first channel of response. In this regard, markets such as South Korea and Taiwan may have additional fiscal buffers in comparison to China and Indonesia (Exhibit 8). Economies such as Malaysia and Indonesia do extend subsidies to dampen the pass-through of high oil prices to consumer. While this protects domestic demand in the near term, it shifts the burden to sovereign balance sheets, and can potentially widen fiscal deficits if elevated prices were to persist for an extended period. (Exhibit 8). On monetary policy, central banks in the region are watching inflation risks more closely, but will probably look through an oil-price jump given that this is a supply-side shock. Overall, the region's structural features and policy frameworks should soften the impact of a one off surge in global energy prices.

Market implication

Q: How have Asian equity markets responded?

In terms of equity, Asian equity market sell-offs in the past week have been broad-based and indiscriminate. For NE Asian indices, over 90% of companies were down last Wednesday and on Monday across Korea’s KOSPI, Japan’s TOPIX and Taiwan’s TWSE. This is likely to be powered by passive index-tracking strategies and in some cases, such as Korea, the leveraged variety of passive strategies.

This means quality companies that are less exposed to the current bout of market volatility, or with good long-term earnings outlook, are also sold by investors. This would argue for opportunities for active managers to hold onto companies with good medium- to long-term prospects, and maybe add on dips. Given the potential for increased equity volatility, option overlay strategies could help investors generate income from market fluctuations. Covered call strategies can help monetize volatility, providing additional income while retaining equity exposure. Further, we view the structural drivers for North Asian equities remain intact. Hardware supply-demand dynamics should stay tight through this year and potentially into next. Japan and Korea also benefit from structural improvements in corporate governance. 

Q: How should portfolios respond?

Inflationary environments typically challenge fixed income, as central banks become more cautious about rate cuts. Even traditional havens like gold have faced headwinds from dollar strength and higher rate expectations. Japanese yen has not shown its traditional safe haven behavior either, given Japan’s own market and fiscal dynamics. U.S. Treasuries which typically act as safe haven assets in such an environment have also seen yields move higher (Exhibit 9). This is likely due to the prospect of higher oil prices that can raise inflation expectations and challenging the narrative for Fed rate cuts. Extended military action could also add pressure to the U.S. fiscal position. 

Meanwhile, U.S. dollar has seen some strengthening, which is a classic risk-off flight to liquidity behavior—investors seeking safety amid geopolitical uncertainty. The mechanics are straightforward: higher oil prices reduce the probability of rate cuts, which supports the dollar. It is not that investors are suddenly more bullish on U.S. assets; rather, the U.S. is relatively insulated as a net petroleum exporter. We continue to believe the dollar could ultimately weaken.

From an asset allocation perspective, investors could look at real assets—such as transportation infrastructure—which could present resilience during bouts of geopolitical tension. The consistent message: stay diversified, reduce concentration risk, and consider alternatives to build portfolio resilience. Markets historically recover from geopolitical shocks relatively quickly unless they morph into a prolonged growth shock, which is not our base case. 

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