The situation in Iran has reversed the flow of funds: investors are shifting from "buying into Asia" to "escaping back to the United States".

The escalating tension in Iran is forcing investors to reconsider one of their most profitable stock investment strategies, with some investors concluding that the trading model of "selling the US, buying Asia" has reached a critical turning point. Although the MSCI Asia Pacific index rebounded on Thursday, it still plummeted 6% overall this week; in contrast, the S&P 500 index only saw a slight decline of 0.1%. This sharp contrast and significant volatility clearly indicate a reversal of the previous trend of global funds rotating towards Asia, with funds now flowing back to the US market seen as a "safe haven", supported by the strengthening US dollar. The impact of the escalating tension in Iran on Asian stock markets is particularly significant, partly attributed to the region's over-reliance on the transport of fuel through the Strait of Hormuz. In addition, concerns about potential sustained supply disruptions causing global economic slowdown are growing, leading to worries that this could weaken the vitality of key export industries in Asia. In this context, investors are choosing to profit from the recent surge in stock markets driven by artificial intelligence trends, especially the standout performances of the South Korean and Taiwanese stock markets over the past year. "Capital never waits for a clear situation - it has already begun to reallocate. The strong trend of the US dollar this week is a strong proof, clearly showing the flow of smart money," said Herbie Chan, senior market analyst at Vantage Global Prime. "Japan, South Korea, and Taiwan are all economies that are purely dependent on imports, lacking effective buffers. This makes the impact of the oil supply disruption on the region exponentially more destructive, with its effects far more severe than on Western economies." It is worth mentioning that Asian stocks have been favored in the past due to their exposure to artificial intelligence hardware, relatively low valuations, and robust profit growth. Oil exposure The significant spike in Brent crude oil prices is further intensifying market concerns about inflation, potentially turning some of the region's inherent advantages into potential weaknesses. Even though there are signs of market rebound, the fundamental dynamics of the market have not substantially changed: despite President Trump's confidence in military action, oil prices continue to rise for the fifth consecutive trading day. Herbie Chan of Vantage noted, "For investment themes like AI capital expenditure, stagflation pressure is the 'ultimate killer'. When capital costs continue to rise, and visibility of economic growth sharply decreases, in this situation, ambitious infrastructure investments in the region will become extremely difficult to garner support and defend at the board level of any company." According to data from Bloomberg Economics, China, India, Indonesia, and other Asian economies are among the world's largest oil importers. Goldman Sachs estimates that a 20% increase in Brent crude oil prices will reduce profitability for companies in the region by 2%. Compared to this, Japan and South Korea are more sensitive to the risk of shipping route interruptions, with higher levels of exposure. Alicia Garcia-Elorza, Chief Economist for Asia-Pacific at Natixis, stated, "Japan and South Korea may face greater pressure because over 60% of their oil imports need to be transported through the Strait of Hormuz." She added that the impact of this event on the Asian economy extends beyond the oil sector, affecting industries such as travel, construction, finance, and defense. The continued rise in oil prices could fundamentally reverse the outlook for Asian stock markets, tightening financial conditions and weakening external balances. In contrast, the US is relatively insulated, benefiting from its status as an energy exporter and a destination for safe-haven capital inflows, according to Eastspring Investments. DWS also believes that, given the large fuel production capacity in the US, the impact of oil price increases is greater on Europe and Asia. The continued upward trend in oil prices could fundamentally reverse the outlook for Asian stock markets, tightening financial conditions, and weakening external economic balances. In contrast, the US, as an energy exporter and a recipient of safe-haven capital inflows, is relatively less impacted by the oil price shock, as noted by Eastspring Investments. DWS also holds a similar view, stating that due to America's significant fuel production capacity, the impact of oil price increases is more pronounced on Europe and Asia. Barclays Global Research Chairman Ajay Rajadhyaksha, in an interview on Wednesday, said, "The Strait of Hormuz plays a crucial role in global energy transport, while the US has a low dependence on Middle East oil. In comparison, the significance of the Strait of Hormuz to Europe is significant, but for major Asian economies like China, Korea, and Japan, its importance is unparalleled." Investors seem to be retracing the market trajectory of 2022, with recent market reactions echoing the situation during the escalation of the Russia-Ukraine conflict, with the strengthening US dollar being a typical example. The strong rise of the US dollar puts downward pressure on the local currency, greatly limiting the central bank's ability to implement loose monetary policy and casting a shadow over corporate profit prospects. According to related data, traders currently expect the Bank of Korea to tighten monetary policy by approximately 50 basis points in the next 12 months, higher than the expectation of about 25 basis points at the end of last month. Rajiv De Melo, Global Macro Portfolio Manager at Gama Asset Management, said, "The lack of loose monetary policy will have a negative impact on the stock market. Previously, sentiment among emerging market investors was extremely high, and now this surge in sentiment is likely to reverse." Asian stock markets face massive outflow pressure from foreign capital Indeed, the rebound in the stock market on Thursday vividly demonstrates the rapid shift in market sentiment. UBS Global Wealth Management has upgraded its rating on the South Korean stock market, based on the fact that the 20% historic pullback in the South Korean stock market and recent market volatility primarily reflect technical adjustments rather than deteriorating fundamentals. Setting aside broader macroeconomic threats, given that Asian stock markets have recently outperformed similar markets in the US, they are more susceptible to the impact of large-scale deleveraging. Data shows that in the first three trading days of this week, foreign investors sold $6.3 billion worth of stocks in the Chinese Taiwanese region. Following this trend, the market is expected to set the second-highest ever weekly net outflow record. By 2025, the MSCI Asia Pacific Index's lead over the S&P 500 Index has reached its highest level since 2017. Despite a recent decline in the index, it still leads the US market by 7 percentage points this year, leaving room for further unwinding of crowded positions in the market. "The sell-off in the current Asian markets is due to multiple factors at play, not just geopolitical risks," said Alfreda Young, client portfolio manager at Alphinity Investment Management. "Given the recent strong performance of some Asian markets, valuations are at high levels, and markets like Korea currently appear particularly vulnerable."