Middle East situation escalates: Is the "sell America, buy Asia" strategy about to reverse?

```

The situation in the Middle East is forcing investors to re-examine this year's most profitable stock strategies. Some investors believe that the once-popular "sell the U.S., buy Asia" trade is facing a critical turning point.

The MSCI Asia-Pacific Index fell 6% this week, while the S&P 500 slipped just 0.1% during the same period, with global capital accelerating out of Asia and back into the U.S. for safe haven. The strengthening dollar further confirms this reversal in capital flow.

The core reason for the pressure on Asian markets lies in their heavy dependence on oil supplies from the Strait of Hormuz, and worries that ongoing supply disruptions may drag down the global economy. In this context, investors are concentrating on cashing in gains made earlier from the AI-driven rally, and the previously high-flying Korean market is facing considerable selling pressure.

Although Asia-Pacific markets saw a technical rebound on Thursday, macro headwinds have not eased. Brent crude has risen for five consecutive days, upward pressure on oil prices remains, and the underlying market logic has not fundamentally changed.

Oil dependence becomes Asia’s biggest weakness

Asia’s structural dependence on Middle Eastern oil has become the most fragile link in this round of supply shock. Bloomberg Economics shows China, India, and Indonesia are among the world’s largest oil importers. Goldman Sachs estimates that a 20% rise in Brent prices would drag Asian corporate profits down by about 2%.

Alicia Garcia-Herrero, Chief Economist for Asia-Pacific at Natixis SA, pointed out, the pressure is especially intense for Japan and South Korea, as over 60% of their oil imports pass through the Strait of Hormuz. She further analyzed that the impact this round has exceeded energy costs alone, spreading to travel, construction, finance, and national defense sectors.

Ajay Rajadhyaksha, Head of Research at Barclays, said in a Bloomberg TV interview:

“The Strait of Hormuz is the lifeblood of global energy, but the U.S. has limited direct reliance on Middle Eastern oil. This issue is important for Europe, but it has the deepest impact on Asian economies like South Korea and Japan, which rely on imports.”

Strong dollar narrows Asian central banks' policy space

Inflation worries triggered by rising oil prices are turning Asia’s stock market resilience into vulnerability. A stronger dollar further pressures local currencies, constraining central banks’ room for easing and dragging down corporate profit expectations.

Bloomberg data shows that market expectations for cumulative rate hikes by the Bank of Korea over the next 12 months have been sharply revised up from about 25 basis points to about 50 basis points. Rajeev de Mello, Global Macro Investment Manager at Gama Asset Management, said:

“The narrowing room for monetary easing will dampen stock market sentiment. Previously, emerging market investors were overly optimistic, but that mood is fading.”

Both Amundi Investment Institute and DWS point out that the United States is significantly better positioned to withstand oil price shocks than Europe or Asia, as it is a net energy exporter and safe-haven funds continue to flow in. Hebe Chen, Senior Market Analyst at Vantage Global Prime, emphasized that Japan, South Korea and other Asian economies are pure energy importers, stating:

“(Japan and South Korea) lack buffer mechanisms, and this round of oil price shock is far more corrosive for Asia than for the West.”

Crowded trades face unwinding; sustainability of rebound uncertain

The previous strong performance of Asian equities makes them face stronger capital outflow pressures in this wave of risk-off. In 2025, the MSCI Asia-Pacific Index outperformed the S&P 500 by the largest margin since 2017; despite the recent pullback, it still leads U.S. stocks by about 7 percentage points this year, indicating crowded bullish positions may have more room to unwind.

Elfreda Jonker, Client Investment Portfolio Manager at Alphinity Investment Management, said:

“The current sell-off is driven by multiple factors and not just geopolitical shocks. Markets like Korea, which have seen large gains and have elevated valuations, are now particularly vulnerable.”

It is noteworthy that Thursday’s rebound also showed that market sentiment can quickly reverse. UBS Global Wealth Management has upgraded its rating for Korean equities, believing the 20% historic pullback and recent volatility mostly reflect technical unwinding rather than a substantive deterioration in fundamentals.

Risk Warning and DisclaimerMarkets carry risks, investment should be cautious. This article does not constitute personal investment advice and does not take into account the individual investment goals, financial situation or needs of specific users. Users should consider whether any opinions, views or conclusions in this article are suitable for their own circumstances. Invest accordingly at your own risk. ```