The historic oil boom is reshaping the outlook for Asian stock and currency markets, as the specter of prolonged high prices exposes the vulnerability of energy-dependent countries.
Risks of rising consumer prices and disruptions in current account balances have triggered large outflows of foreign capital in markets like India and South Korea in recent days, weakening their currencies.
A few resource-rich countries, such as Australia and Indonesia, are among the beneficiaries as their markets have weathered the downturn since Russia invaded Ukraine. Russian oil sanctions pushed the price of Brent to $139 a barrel earlier in the week.
“There couldn’t be a more appropriate time than now for investors to remain well-diversified across assets,” said David Chao, global market strategist for Asia-Pacific ex-Japan at Invesco Ltd. “It makes sense to be overweight natural resources and countries that are the biggest commodity exporters in energy, agriculture and metals.
Here is an overview of the positioning of certain Asian markets in the face of high energy prices:
The country is a world leader in the production and export of metals and minerals, including coal, iron ore and gold. Oil and natural gas account for more than 15% of Australia’s export earnings, according to RBC Europe Ltd.
The benchmark S&P/ASX 200, where hardware companies make up a quarter of the weighting, has fallen 2% since Feb. 23, the day before Russia invaded Ukraine. This is against a drop of more than 7% for the MSCI Asia Pacific index. Miners like Cimic Group Ltd. and Whitehaven Coal Ltd. jumped at least 27% during the period, while the Australian dollar rose more than 1% against the greenback on Friday night in Asia.
Indonesia and Malaysia are the world’s top two exporters of palm oil, a status that has helped lure investors amid a global stock rout. The Jakarta composite index held up as the rupiah is the only gainer among Asian currencies since the invasion of Ukraine.
A resilient ringgit supported foreign inflows into Malaysian equities. Down just over 1% since February 23, the local equity benchmark is doing better than the regional market.
“It’s the classic inflation hedge,” said Wai Ho Leong, strategist at Modular Asset Management in Singapore. “I would look for Malaysian assets to buy on the cheap,” he said, adding that the currency was still “fundamentally undervalued.”
In India, which imports around 85% of its oil needs, foreigners are selling off stocks at a record pace and the exodus has sent the rupee plummeting to a record low. The benchmark S&P BSE Sensex is down 2.9% since Feb. 23, with buying by domestic funds amid a retail frenzy helping to limit stock losses.
Still, the risk of an inflationary shock poses a challenge to the central bank and financial markets in a country that is probably the most vulnerable to the Brent surge. Earlier this month, Credit Suisse Group AG double downgraded Indian equities to underweight them in their Asian allocation, while upgrading Australia.
Another major oil importer, South Korea is also experiencing an overseas selloff that has contributed to its currency’s weakness. The won is down about 3% against the greenback since the invasion of Ukraine, Asia’s second worst performer.
The Kospi index, which was the region’s biggest loser in 2022 among national benchmarks before the start of the war, has fallen nearly 11% since the start of the year, as rising yields threaten erode the profits of its technology heavyweights. The outlook has improved slightly as new president-elect Yoon Suk-yeol is expected to be more business-friendly than his predecessor.
The dynamic is slightly different for Chinese markets, where regulatory concerns have hammered stock prices. China imports about 15% of its oil from Russia and may be able to pay lower prices for those imports due to lower demand from the United States and Europe, according to chief economist Jian Chang. of Barclays Plc. A host of policy tools also means Beijing can order state-owned oil refiners to cut profits to cap fuel prices.
Soaring fuel prices threaten a nascent recovery in Thailand’s tourism-dependent economy, just as the country was beginning to open up to international travel. The likely loss of Russian tourists, the largest group of travelers in January, would deal another blow to the economy.
The baht is the worst performing Asian currency since the invasion of Ukraine, while the SET index fell more than 2%.