Morgan Stanley says sell Asian stock rally on Iran war impact

The bearish view on Asian shares stands in contrast to a growing chorus among market experts calling for a rebound in US stocks.

• Morgan Stanley warns of deeper downturn in Asian equities.
• Energy price surge and supply issues threaten Asia markets.
• Asian stocks could drop 15%-20% in a bear market.

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Morgan Stanley recommended investors sell into this week’s rally in Asian equities, warning of a deeper market downturn as energy prices surge.

Brent crude has traded closer to the bank’s adverse scenario of $120 to $130 per barrel, strategists including Jonathan Garner wrote in a note. An overnight attack on a major liquefied natural gas site in Qatar may also hurt crucial LNG exports to Asia.

“Asia is more vulnerable than other regions to the ongoing interruption in oil, LNG,” they wrote in the Thursday note. “In the adverse scenario, we would expect Asian markets to resolve down towards our bear case targets, which are 15%-20% below current levels.”

Asia’s stock benchmark rose for three straight days through Wednesday as investors shifted their focus to the region’s artificial intelligence winners following bullish comments on AI demand from Nvidia Corp. Chief Jensen Huang.

The bearish view on Asian shares stands in contrast to a growing chorus among market experts calling for a rebound in US stocks. While global markets have come under pressure this month amid geopolitical risks and rising energy costs, US assets have remained relatively resilient thanks to its status as a net energy exporter. The S&P 500 Index has fallen only 3.7% so far in March compared to a 7.6% drop in the Asian benchmark.

Surging oil prices due to the Iran war is weighing on the economies of net energy importers, which are predominantly located in Asia. Brent crude topped $112 per barrel on Thursday as the war in Iran escalated.

Asia is also vulnerable to disruptions in other input products to agricultural and industrial production including ammonia, urea, helium and sulfur, Morgan Stanley strategists said. Other factors weighing on regional markets include signals from the Federal Reserve that it may keep rates on hold amid a potentially stagflationary macro environment, they said.