Back in November, HSBC’s head of Asia equity strategy, Herald van der Linde, held a sanguine view on where Asia’s economies were headed in 2026. In a report titled, The year ahead in 2026, van der Linde and his HSBC colleagues, Prerna Garg, Adam Qi and Varun Pai were overweight on mainland China, Hong Kong, India and Indonesia, neutral on Malaysia and the Philippines, and underweight on Japan, Korea, Singapore, Taiwan, Thailand and Vietnam.
That picture, however, has changed dramatically thanks to the war in Iran, which has sent fuel prices surging. Roughly 20% of the world’s oil and gas passes through the Strait of Hormuz, which is now under a blockade by the Iranians. The price of Brent crude oil rose above US$140 ($180) per barrel on April 2, the highest since 2008.
“The energy supply shock caused by the conflict in the Middle East has shifted the tone for Asian equities as higher energy prices lift input costs, weigh on margins and may change the course of monetary easing across the region,” says van der Linde and his colleagues in a March 31 report titled Looking beyond the uncertainty. The report is part of HSBC’s “Asia Equity Insights Quarterly” series.
While van der Linde and his team have maintained their overweight rating for mainland China and Hong Kong, they have downgraded their ratings for India and Indonesia to neutral and underweight, respectively. Countries such as Singapore and Taiwan have received a bump; the former received an overweight rating and the latter a neutral rating.
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“In the near term, we see heightened volatility across the region, but this is not a structural derailment of the growth story in Asia,” HSBC’s analysts write, adding that investors should keep a level head and not get too fixated on timing the end of the war.
“Rather than getting caught up trying to predict things we can’t reliably forecast — like day-to-day oil price swings or how many ships will pass through the Strait of Hormuz — it often makes more sense to focus on what’s more likely to endure over time.”
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Singapore and Malaysia attractive
Months ago, van der Linde and his team were bullish on Indonesia’s prospects. They expected Southeast Asia’s largest economy to be on the upswing, given that policy initiatives had been scaled up to support growth and that monetary policy was being relaxed. Elevated oil prices and food prices have now dampened those expectations.
Last month, Indonesia announced it was cutting President Prabowo Subianto’s flagship Free Nutritious Meal programme from six to five days per week. The move is expected to save the government around IDR40 trillion ($3.03 billion) as it grapples with a higher fuel subsidy bill amid the oil crisis.
“There isn’t much extra policy room with markets watching the 3% deficit cap in 2026, though the cap can be crossed, given that it is not a normal year. We are concerned about the growth recovery given all this. Consensus is still pencilling in an earnings growth of 13% for 2026, which we find a bit ambitious,” says van der Linde and his team.
Notably, HSBC’s analysts are “not overly concerned” about the potential downgrade of Indonesia by MSCI. The country endured a US$80 billion global market rout after MSCI raised concerns about Indonesia’s limited market transparency.
“MSCI’s comments primarily underscore structural issues such as concentrated ownership, thin liquidity, and a limited IPO pipeline,” they write, noting that Indonesia’s regulators appear committed to addressing MSCI’s concerns, such as raising their minimum free float requirement for listed companies.
“Our primary concern is the medium- to long-term growth outlook. Earnings momentum has been weak for several quarters, as high inflation, elevated interest rates, and intensifying competition from mainland Chinese firms weighed on household income growth and purchasing power,” they add.
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In fact, it’s not just oil and food. In their report, van der Linde and his colleagues flag the possible hit to Asia’s medical tourism sector because of the war in Iran. According to HSBC, roughly 20% to 25% of Thailand’s hospital revenues and 4% to 5% of India’s hospital revenues come from medical tourists from the Middle East. “If Gulf patients postpone travel, it can hit hospitals, hotels and retailers,” they write.
That said, it’s not all doom and gloom within the region. HSBC sees both Singapore and Malaysia as relative bright spots due to their defensive nature.
“Singapore equities stand out for their defensive appeal, especially when growth elsewhere in Asean is weak,” van der Linde and his team write, adding that a large part of the city-state’s appeal lies in the profitability of its three big banks: DBS Bank, the United Overseas Bank and the Oversea-Chinese Banking Corporation. The trio make up roughly half of Singapore’s flagship Straits Times Index (STI) by index weight.
“A key element of the investment case for Singaporean banks is the prospect of more active capital management, particularly through special dividends and share buybacks. This is particularly relevant amid elevated geopolitical uncertainty, especially as sentiment and growth across the rest of the Southeast region remain subdued.”
The same goes for Malaysia, which HSBC says is buoyed by its strong macroeconomic position, its status as a net energy exporter, and the stability of its foreign exchange. “Malaysia benefits from a large domestic fund management base that often steps in when markets fall – one reason it’s typically less volatile within Asia,” van der Linde and his team write.
Taiwan over Korea for AI
While HSBC is confident that Taiwan and Korea’s growth will remain robust due to the AI boom, it believes Taiwan offers a better return than Korea. “We refrain from increasing exposure to Korea, despite its equal participation in the AI story, as we think the optimism on that market is approaching its peak,” the bank’s analysts write.
HSBC’s key concern about Korea is its crowded positioning, with the country’s active weight in global emerging-market funds at a multi-year high. In contrast, Taiwan appears relatively more defensive and offers a higher risk-reward, thus justifying its upgrade to neutral from underweight.
Van der Linde and his team do not see the energy crisis posing an immediate risk to the growth of the AI sector, though they did acknowledge the impact of surging energy prices on the industry.
“A key area to monitor is the outlook for AI capex. Rising energy costs can pressure hyperscalers’ margins, raising investor concerns around the returns these investments can deliver,” they write. “In addition, any volatility in equity and credit markets could dampen the funding appetite for these AI projects.”
Sticking with China, Hong Kong
Back in November, HSBC was more bullish on India’s growth story for 2026. Van der Linde and his team felt that India was attractive and that their equities offered more value than those in China. That narrative has now fallen apart because of Iran.
“India started the year promising,” van der Linde and his team write. “However, the conflict has brought growth risks back into focus, given India’s heavy dependence on imported energy.”
According to the International Energy Agency, India was the second-largest net importer of crude oil in 2023. India’s domestic oil production accounts for just 13% of its supply, making it heavily reliant on imports to meet the shortfall. Oil shortages have become a very visible problem in India, with restaurants dropping deep-fried food from their menus to conserve cooking gas. Some restaurants have decided to cease operating entirely.
“A potential resurgence in inflation could undermine the gradual recovery in demand and lead to a rise in non-performing loans across the lending sector. The larger risk sits for FY2027 earnings, particularly if oil remains above pre-crisis levels,” van der Linde and his team write, citing historical data which states that a rise in crude prices by 20% will result in a compression in earnings by 1.5%.
This essentially means that earnings per share for Indian equities in FY2027 could contract by five percentage points if Brent crude reaches US$120 a barrel.
On the other hand, the growth story of mainland China and Hong Kong has held up even amid these trying times. This is mainly due to market conditions and the emergence of new growth drivers, says HSBC.
Firstly, the region will continue to enjoy ample liquidity from households and institutions looking to invest in China’s stock market.
“Mainland Chinese households and institutions are likely to continue rotating into equities,” the analysts write. “On our estimates, there is plenty of cash in China for them to acquire more local equities in either Hong Kong or Shanghai and Shenzhen. Albeit perhaps not at the velocity they acquired stocks last year.”
Secondly, China’s housing market is expected to reach its low point this year. HSBC says this will help to stabilise household wealth after years of falling prices. “While prices may still face pressure, any further calls should be more modest,” the analysts add.
Thirdly, new growth areas such as AI, biotech, and robotics, as well as the expansion of Chinese corporates, such as EV maker BYD, into foreign markets, will help boost the region’s fortunes. “This recovery in growth, combined with a relatively stable currency and general underweight positions by foreigners in this market, supports our overweight on Chinese equities,” HSBC writes.
To be sure, van der Linde and his team recognise that the prevailing geopolitical volatility makes it difficult for investors to find safe havens to park their capital. Growth expectations have yet to price in the risk of a sustained disruption to global energy supplies, they add.
“The conflict in the Middle East has changed the dynamics for Asian equities considerably and it’s likely to stay this way for as long as oil prices stay high and markets remain cautious with elevated volatility,” they write. “The challenge is that there aren’t many obvious alternatives right now — Japan, Korea and India are net oil importers — and while Malaysia and Singapore can continue to be more defensive, those two markets are relatively small.”
