‘U.S.-IRAN TENSION BEARISH FOR ASIA’
Demand for local consumer discretionary products set to be dampened, says expert
THE soaring tension between the United States and Iran, made worse by the latter’s recent retaliatory missile strikes in Iraq, is a bane for Malaysian and other Asian equity markets, said local and foreign analysts.
The key FTSE Bursa Malaysia KLCI dropped 1.36 per cent to 1,589 points yesterday from its Tuesday’s closing of 1,611 points as missile attacks by Iran on US forces in Iraq raised the spectre of a spiralling Middle East conflict and disruption to crude oil flows.
Reuters reported that Asian shares tumbled yesterday, while oil, safe-haven Treasury prices and gold shot higher after the incident.
Oil prices rose yesterday, but remained below their peaks hit in frenzied early trading after the rocket attacks.
Prices gave up most of their early gains as analysts said market tension could ease as long as oil production facilities remained unaffected by attacks, it added.
Jeffrey Halley, OANDA senior market analyst for Asia Pacific, told the New Straits Times that the worsening situation could delay the signing of the US and China trade agreement next week.
“The situation is potentially acting as a ‘brake’ on a pick-up in economic activities in Asia as it is heavily dependent on imported energy,” he said.
Halley said investors’ confidence would return to developing markets once the US stepped back from Iran.
“Otherwise (with a prolonged tension), confidence will be dented for possibly a long period of time and may jeopardise the signing of the US-China trade agreement.”
Halley said a disruption of oil and gas supplies through the strategic Strait of Hormuz could lead to a big spike in prices, therefore slowing demand for the black gold.
“Oil is one part of the economy. Rising oil prices will push up petrol and energy prices in Malaysia as well. This in turn would dampen demand for consumer discretionary products,” he said, adding that manufacturing and transport stocks were likely to take a hit.
Halley said airline travel would also be disrupted if the airspace in the Middle East was closed to civilian traffic.
The United States’ Federal Aviation Administration had already banned US carriers from flying over Iran and Iraq while local airlines had started rerouting.
Halley said local energy stocks were likely to gain in the shortterm if oil and gas supply was disrupted.
Bursa’s energy index dropped 20.82 points, or 1.64 per cent, to 1,249 points, with Alam Maritim Resources Bhd and four sectoral stocks making up half of the bourse’s 10 most-active counters yesterday.
He said developing markets were not a safe haven in a crisis for investors as the region was heavily dependent on imported energy.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said financial markets had become increasingly jittery over development in the Middle East.
“The recent ballistic missiles shot by Iranian forces against US military bases in Iraq suggest that a potential military escalation should not be underestimated,” he told the NST.
Afzanizam said the rule of thumb had always showed that markets dislike uncertainty.
“Naturally, savvy investors, especially the institutional ones, will allocate more funds to safehaven instruments such as money markets and bonds,” he said, adding although the returns were low, at least investors could protect their investment principle.
Afzanizam expects regional equities and forex markets to be volatile in the upcoming periods as safe-haven currencies such as the US dollar and yen would be highly in demand.
“In the process, developing economies’ currencies would weaken because of the flight-tosafety phenomenon. Therefore, the conflict in the Middle East will be associated with oil prices,” he said.
Afzanizam also said energy stocks’ value could rise as the Organisation of the Petroleum Exporting Countries members had agreed to cut supplies by 2.1 million barrels per day beginning this month.