Asia as a safe haven

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With the turmoil in the Middle East continuing on its second week, the Asian region is now being viewed as a safe haven for economic stability and investments.

Noting this perception, China yesterday quickly  stepped up on the global stage at a press conference to assure that it is  ready to lead the region toward communal peace and development, according to its Foreign Minister Wang Yi.

In an online briefing last week for Asian journalists, J.P. Morgan economists Jahangir Aziz, head of emerging markets economic research, and Serene Chen, head of credit, currency and emerging market sales APAC, were still optimistic that the  turmoil brought about by the joint attack by Israel and the United States on Iran, and the subsequent retaliation of Iran on US allies in the Gulf Cooperation Countries or GCC, is still a regional conflict even as they carefully monitor how long – and if the conflict will result in major damage to the oil producing region – will play out.

According to Aziz, “for regional conflicts to have global impact, there has to be a link between the regional conflict and global economics. Here, clearly, the link is oil and what happens to oil prices.” He pointed out that their oil analyst noted that while there would be a knee-jerk reaction when the markets react, it would eventually smoothen out and would not necessitate an immediate change in their original oil market forecast.

Aziz pointed out that the oil market is actually in excess supply following the entry of new additional suppliers and “this excess support is adding to supply, and this supply is going to continue beyond 2026 and 2027. So, even though demand remains strong as growth in the global economy is sustained and remains strong, it is this excess supply which is keeping oil prices down. So if you’re going to think about what might get oil prices to jump up, you need something that is sustained... a correction, a reduction in supply, that is a state.”

But with the turmoil entering its second week, there has been an uptick in crude oil prices as oil tankers remain grounded, fearing possible attacks while passing the Strait of Hormuz that is controlled by Iran.

Aziz argued that “We do not know how long this is going to last. What is the form it is going to take? How intensive will the response be for Iran?” He acknowledged though “there is a lot of uncertainty surrounding it. At the end of the day, again, you know, I’m repeating the point that, look, it is going to have an impact on the region. The conflict has moved to the region. Clearly, the impact will be in the region, but for the global economy, you need to see a sustained increase in oil prices.”

Additionally, Aziz argued, “until we get evidence that either oil infrastructure is being damaged, or if we see that the Hormuz Strait will be blocked for weeks or months, I think this will, unfortunately, be an unfortunate regional conflict, and the impact on the global economy is, look, it’s not going to be positive. Obviously, any rise in political uncertainties isn’t good for economics. We know that. But right now,...we don’t really think that, you know, this is going to be a systemic shock to the global economy. Again, these could be famous last words, but right now, that’s what people think, right?

Chen agreed with Aziz’s initial observation, but admitted that “I think the initial knee jerk reaction is always when conflict arises, it is always a flight to safety. So, as a result, you would have seen gold rally, you would see people buying dollars, buying US treasuries. But from the extent of the rally... it’s not to the magnitude of what people would expect if you think this is going to be a major event for the global economy.”

On the question of safe havens, Chen replied, “That’s actually the question that we are being asked the most  in the last few weeks coming up to the conflict. I don’t think there is a one solution that fits all, right? Of course, gold, oil are always in the mix of people’s discussions. But in Asia originally, if you think of so-called safe haven status countries, Singapore is definitely one. So, I think from that perspective, you will see continued interest.”

Among the instruments that J.P Morgan has observed has gotten positive response to are Singapore government bonds and even the Singapore dollar which they noted gave higher yields.

According to Chen, “So I think the safe haven status in Asian countries, you are going to expect some inflows because now the Middle East’s stability is in question. So in the past, of course, the GCC region has had very great ratings, right? Single A and above, many of the currencies are pegged to US dollars, so (they) have certain status... but now I think Asia  safe haven status countries are going to probably benefit a little bit more in this context.”

Chen notes that  the market is expecting a relatively short event or regional conflict that  is not very widespread. “Many clients would see this as a potential, I would say, of course, you need to do a bit of hedging, but it doesn’t necessarily change their long term trajectory. We’re still getting inquiries, especially on the tech driven, more AI related  economies.

Some clients... they considered this potentially buy-on-dip opportunity... If this becomes a much bigger and prolonged conflict, then I think people may change the base case, but for now, we don’t see a fundamental shift yet. In fact, we do see clients coming outside of the region to do regional trips to Korea, to China, to Taiwan, wanting to understand the AI stories in the region, which is the reason driving all the equity markets in the region.”