Commentary: The U.S.-Iran War Is a Wake-Up Call for Asian Markets

1. The ongoing conflict between the United States and Iran has significantly disrupted global capital markets, causing economic shocks that differ fundamentally from those observed during the 2022 Russia-Ukraine war. Whereas the war in Ukraine primarily impacted European energy supplies, the current Middle Eastern conflict—initiated by U.S. President Donald Trump during his second term—directly affects Asian manufacturing and global shipping, creating broader economic reverberations [para. 1].

2. On the geopolitical front, President Trump has adopted an isolationist foreign policy, likened to a modern Monroe Doctrine ("Monroe Doctrine 2.0"), which includes aggressive tariffs and difficult relationships with traditional allies such as NATO and the G7. This approach has escalated disputes over trade, territorial claims, and defense spending, potentially increasing divisions within these alliances [para. 2].

3. In parallel, China is beginning the first year of its 15th Five-Year Plan, aiming for economic growth between 4.5% and 5.0%. The Chinese government is prioritizing proactive fiscal policies and rapid technological progress in artificial intelligence, large language models, and robotics to sustain development and counteract external shocks [para. 3].

4. Asian financial markets, especially those in Japan, South Korea, and India, have experienced dramatic declines, which function both as a correction following previous rallies and a reaction to the region's dependence on imported energy. Japan, under Prime Minister Sanae Takaichi, and South Korea remain particularly exposed to persistent rises in oil prices, revealing their vulnerability to trade and energy supply disruptions. Although there have been tentative rebounds, the risk remains pronounced [para. 4].

5. A central element of the crisis is the Strait of Hormuz, a strategic maritime chokepoint through which about 20 million barrels of oil (more than 25% of global seaborne oil trade) and 20% of the world’s liquefied natural gas are transported daily. The Middle East also produces roughly 20% of the world's urea, a crucial chemical input. Unlike during the Ukraine war, when Asian countries accessed discounted Russian energy, a blockade here poses a direct threat to key Asian economies' energy security [para. 5].

6. Oil prices have already surged, reversing the previous downward trend. While the release of strategic reserves and production changes have provided brief relief, deliberate attacks on petroleum infrastructure heighten the risk of a further price surge [para. 6].

7. The impact of the conflict will depend on its duration. While a rapid diplomatic solution offers the best outcome, evidence, including extended requests for U.S. military intelligence, points to a drawn-out confrontation. For Trump's administration, especially with midterm elections approaching, prolonged warfare and elevated oil prices could fuel domestic inflation and erode political support. A protracted conflict would likely force the Federal Reserve to postpone planned interest rate cuts, increasing the risk of stagflation and reduced global consumer demand [para. 7].

8. China faces both dangers and openings due to the war. Rising oil prices could accelerate imported inflation and producer price increases, while heightened global risk aversion and potential U.S. trade probes may weigh on Chinese exports. However, China’s energy self-sufficiency—rooted in coal, with diverse supply lines—provides some insulation. Despite the turmoil, China’s stock market has remained relatively robust thanks to earlier regulatory interventions [para. 8].

9. China’s best strategy is to maximize its structural advantages by leveraging its comprehensive industrial system and leadership in renewable energy, energy storage, and grid technologies. Reinforcing the nation's technological edge—particularly in AI and robotics—can help mitigate external risks and propel the transition toward a digitized economy [para. 9].

10. For investors, global risk aversion is favoring safe-haven assets (gold, silver, USD), while oil and gas equities are benefiting in the short term. If the situation persists, global companies will face rising input and transportation costs alongside weaker demand. In China, market adjustments will be sharpest in energy and shipping but technology stocks are expected to remain resilient, while stable-yield credit bonds should offer protection against volatility [para. 10].