The unfolding war in the Middle East has created a complex investment landscape for Asia, which relies heavily on energy imports, and is vulnerable to inflation shocks and sovereign risks.

For Asian investors, the implications are particularly acute. While markets in the Asian region have so far remained relatively insulated, the tail risks of further escalation are significant, according to analysts from AllianzGI, deVere, Fitch Ratings, Indosuez, Lazard, Lombard Odier, Nuveen, Robeco, and William Blair.

For Asia, the stakes are high, and portfolio resilience will depend on disciplined positioning, selective allocation to energy producers, and a careful balance between risk assets and safe havens.

With Iran and allied groups hitting targets in the Gulf following the death of Ayatollah Ali Khamenei and US and Israeli forces mounting relentless strikes against Iran, the raging conflict is sending ripples across financial markets globally, according to analysts.

Oil price surges

Nigel Green, chief executive officer of the deVere Group, notes that the closure of the Strait of Hormuz, the narrow passageway for roughly 20% of global crude supplies, has already triggered one of the sharpest oil price spikes in over a year, with Brent crude surging above US$87 per barrel and West Texas Intermediate climbing past US$83, as of March 3.

( Iran’s Islamic Revolutionary Guard Corps, or IRGC, has declared that the Strait of Hormuz is closed as of March 2 and reiterated they have full control as of March 4, resulting in shipping suspensions and major traffic halts, but the waterway is not 100% sealed, according to some reports. Occasional ships were running with the Automatic Identification System or AIS off, and the US is considering escorting tankers. The impact is real and severe, but as of March 5 the “closure” is partial, and there is effective disruption rather than total shutdown. )

“When oil surges with this magnitude and velocity, inflation doesn’t edge up slowly; it gathers force rapidly,” Green says, warning that investors must prepare for interest rates to remain elevated well into 2026, as central banks respond decisively to renewed inflationary pressures.

For Asia, where economies such as Japan, South Korea, and China depend heavily on Gulf energy flows, the risk is magnified.

Lazard’s Geopolitical Advisory notes that nearly 80-85% of oil and LNG passing through the Strait flows to Asian markets, with China alone purchasing roughly 80% of Iran’s exported crude. “Japan is among the most vulnerable advanced economies, with nearly 80% of its crude oil imports sourced from the Gulf and transiting the Strait,” Lazard analysts note.

Reduced ME exposure

Marcelo Assalin, partner and head of the emerging markets debt team at William Blair, says his team has already reduced exposure to Middle East sovereign credit ahead of the strikes, citing asymmetric risks.

“We have been rotating away from oil‑sensitive importing countries toward oil exporters in more neutral geographies as energy prices rise,” Assalin says. He adds that while tail risks of further escalation remain, his portfolio remains underweight the Middle East, with diversified corporate credit holdings showing limited response so far.

Similarly, Allianz Global Investors’ chief economist Christian Schulz says markets are repricing tail risks. “Oil prices will likely rise even if a sustained closure of the Strait of Hormuz remains unlikely for now,” he notes.

While equities may see a sharp but short‑lived sell‑off, safe‑haven assets such as US treasuries, the dollar, and gold are likely to benefit, Schulz adds.

Downward pressure on growth

Lombard Odier’s chief economist Samy Chaar and head of investment strategy Luca Bindelli outline two scenarios. First is a contained escalation with modest oil price rises, and second is a risk scenario involving a global oil shock with prices rising by as much as US$50 per barrel.

In the latter case, Asian economies would face downward pressure on growth and upward pressure on inflation. “Elevated volatility across risk assets is expected in the weeks ahead,” Chaar and Bindelli say, adding that their strategy remains moderately risk‑on, with overweight exposure to emerging-market assets and gold.

Indosuez Wealth Management’s global chief investment officer Alexandre Drabowicz and chief strategist Francis Tan also stress the importance of oil as the primary transmission channel for global impact. They outline three possible scenarios ranging from contained de‑escalation to stagflationary shock.

“It is premature to ‘buy the dip’,” Drabowicz says, urging disciplined positioning amid elevated uncertainty.

Sovereign rating impacts

Fitch Ratings warns that the scope and duration of the conflict will determine sovereign rating impacts across the Middle East. Senior director Paul Gamble warns that while most Gulf sovereigns have sufficient buffers to withstand short disruptions, prolonged hostilities or damages to energy infrastructure could pose risks.

For Asian investors, this raises concerns about exposure to sovereign debt linked to Gulf economies. “Material damage to [Gulf Cooperation Council] energy export infrastructure would be the most likely channel to pressure sovereign ratings,” Gamble says.

Robeco strategist Martin van Vliet notes that fixed income markets have so far responded in an orderly manner, with investors rotating into intermediate-maturity sovereign bonds.

“The key macro risk lies in commodities, particularly with the effective disruption of shipping through the Strait of Hormuz,” van Vliet says.

Colin Graham, co‑head of investment solutions, adds that investors are retreating towards traditional safe havens such as oil, gold, the US dollar, and treasuries.

Nuveen CIO Saira Malik, however, maintains a relatively steady outlook on US monetary policy. “We anticipate two 25 basis points rate cuts this year,” Malik says, noting that while oil shocks may drive up inflation, she does not expect near‑term changes to the Federal Reserve policy.

For Asian investors, this suggests that US yields may remain range‑bound, offering some stability amid global volatility.