Asian stocks extend declines as Middle East tensions remain high

Representative image (Courtesy: Bloomberg)

Asian stocks extended losses into a second day as mounting conflict in the Middle East intensified risk-off sentiment among investors.

The MSCI Asia Pacific Index dropped as much as 2%, setting the gauge on track for its worst two days in 11 months after US and Israeli strikes on Iran. South Korea led equity losses, tumbling by more than 5% on their return from a holiday and briefly triggering a sell-order halt for program trading.

“The investment question is not primarily about Iran itself — it is whether the conflict leads to a larger value-at-risk episode driven by correlation into other markets,” said Nick Ferres, chief investment officer of Vantage Point Asset Management in Singapore. “My guess is that markets traded as though the conflict would be relatively short last night. However, that view might be too optimistic.”

In the latest sign of rising tensions, Iran stepped up its retaliation strikes by attacking the US embassy in the Saudi capital of Riyadh, and also threatened a full closure of the Strait of Hormuz — a crucial waterway for the movement of oil and gas. Brent rose past $79 a barrel after spiking jumping more than 7% on Monday.

The volatility is forcing some investors to lock in year-to-date gains in hot markets and sectors like technology after a frenzy around all things artificial intelligence. Heavyweights Samsung Electronics, SK Hynix and TSMC were among the biggest drags on the regional gauge.

Still, Korea’s Kospi and Taiwan’s Taiex Index are up 42% and 20% respectively this year, among the best performing gauges globally.

If transport disruptions persist in the Strait of Hormuz, that could continue to weigh on Asian equities that have been trading at record highs, said Dilin Wu, a research strategist at Pepperstone Group. “Any further supply tightening can quickly push up costs, squeeze corporate margins, fuel inflation, and weigh on risk assets.”