US-Iran conflict: Exposing the high leverage in Asian stock markets?

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Trump’s military action against Iran caused North Asian stock markets to suffer the most severe declines globally. The deep roots of this crash are not the direct impact of Middle Eastern turmoil on the Asian economy, but the excessive crowding of AI semiconductor trades and historically high leveraged positions, which led to forced unwinding under external shocks.

On Wednesday, panic selling swept through Seoul and Tokyo. Korea’s benchmark KOSPI index dropped more than 10% for two consecutive trading days, marking the largest two-day decline since 2008. Previously, global capital was rotating massively from US software stocks to Asian semiconductors and hard-tech targets, with Korea’s margin balance and the number of new accounts both reaching historic highs.

After the Iran conflict erupted, the US dollar surged, reducing the appeal of emerging market assets. At the same time, the market worried that persistent oil price shocks would push up inflation, forcing local central banks to raise interest rates, thereby increasing the cost of financing trades. Korea’s financial conditions, previously at the most accommodative level in decades, faced a sudden tightening, with high-leverage long positions bearing the brunt. The original theme of global diversification “sell America” turned into indiscriminate selling of Asian assets under the dual pressures of crowded positions and capital outflows.

Bloomberg analysts believe the main driver of this round of selling came from capital flows rather than fundamental deterioration. The supercycle narrative of memory chips by Samsung Electronics and SK Hynix, as well as the AI capital expenditure trend proved by TSMC’s strong performance, have not seen substantive reversal – revisions to Asian corporate earnings remain stronger than those in the US.

Capital flows dominate the crash: Why is North Asia the hardest hit?

Bloomberg points out that sharp market declines are often more related to capital flows than to actual fundamental changes. Before the crash, as global investors rotated from software companies to AI infrastructure assets, hot money flowed massively into Asia seeking semiconductor and hard-tech allocation opportunities. The sustained spread of this AI trade was the deep underlying cause of North Asia’s sharp decline this week.

North Asian economies are certainly highly dependent on oil and gas imports, but in terms of direct energy shocks, Europe’s risk of an energy crisis in this Middle Eastern conflict may be even more pressing.

Moreover, unless the Strait of Hormuz remains blocked for a long time, North Asian economies have some buffer with their national strategic reserves—Japan is estimated to have about 254 days of oil reserves. This implies that North Asia’s intense sell-off is not pricing in real economic shocks, but is more about the rapid unwinding of leveraged positions.

AI narratives gather hot money, record positions set risk

Before the crisis, the investment narrative of North Asian hard tech was almost universally bullish. Samsung Electronics and SK Hynix both stated that the tight supply of memory chips will persist through 2027, and the market generally expects both companies have entered a long multi-year supercycle. Analysts’ earnings expectations for Samsung continue to be revised upwards. Meanwhile, TSMC's strong results further confirm that major US tech firms will continue to increase AI capital spending, and the logic supporting Asian suppliers remains intact.

Hot money quickly clustered around a handful of winners. According to Bloomberg data, in the week before Middle Eastern tensions escalated, the iShares MSCI Korea ETF (with assets worth $16 billion) saw over $1.2 billion in net inflows, marking its largest weekly inflow in 25 years since inception. Meanwhile, Korean retail investors abandoned their decades-long avoidance of blue-chip stocks and aggressively bought KOSPI components, with active account numbers and margin balances both hitting record highs.

Thus, Asian AI infrastructure trades became highly crowded—setting the stage for subsequent stampede selling.

Middle East conflict triggers de-leveraging chain reaction

As the Iran conflict intensified, capital began to retreat. The surging dollar eroded the logic for emerging market asset allocation; at the same time, the market worried that persistent oil shocks would drive inflation and force central banks worldwide to raise base rates, increasing the funding costs of trading on margin.

According to Goldman Sachs and Bloomberg data, Korean financial conditions had previously been at their most accommodative in decades. Once funding costs started tightening, long positions supported by margin balances faced forced unwinding, accelerating the downward spiral.

The deeper issue is that this year’s international diversification theme made capital inflows into North Asia far more intense than usual. A geopolitical shock thousands of miles away is enough to trigger violent reversal. The “sell America” reallocation logic thus turned into indiscriminate liquidation of Asian assets.

De-leveraging is painful, but may be a healthy correction

Bloomberg analysis suggests this sell-off may be a painful but healthy de-leveraging process. It will flush out momentum-driven speculators who chase highs and sell lows, returning the market to investors who truly focus on corporate earnings and reasonable valuations.

In terms of earnings fundamentals, upward revisions to Asian earnings remain stronger than in the US, and analyst expectations for Samsung’s earnings are still being revised upwards, with no substantive downgrade to its supercycle narrative. Once deleveraging is complete, for capital truly focused on the semiconductor supercycle and long-term AI infrastructure trends, post-clearout valuation levels may provide a much firmer foundation for re-entry.

Risk Warning & DisclaimerThe market carries risks. Investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situation, or needs of any individual user. Users should assess whether any opinions, views, or conclusions in this article fit their own circumstances. Investing based on this is at your own risk. ```