Asia's economy and asset performance diverge sharply under the energy shock
AI summary card
Asia's economy and asset performance diverge sharply under the energy shock
Nomura believes Asia is at the center of the energy shock triggered by the US-Iran conflict, but the impact varies greatly across economies: Thailand and the Philippines are more vulnerable to growth downside, while Taiwan, Singapore, Malaysia, and China are relatively more resilient, creating FX and rates trading opportunities.
- Thailand and the Philippines face the highest downside growth risk, while Taiwan, Singapore, Malaysia, and China are relatively more resilient.
- Inflation in the Philippines, Australia, and New Zealand is expected to run above central bank targets, and the Philippines, Singapore, and Australia are more likely to see core inflation pass-through.
- Fiscal policy is Asia's first line of defense, but India and Indonesia face a higher risk of fiscal slippage, with downgrade risk in Indonesia and Thailand.
- Monetary policy responses are diverging: Australia, the Philippines, New Zealand, and Malaysia are more likely to hike, while China and Thailand are expected to keep rates unchanged.
- On the strategy side, the preferred trades are long EUR/INR, long SGD/IDR, short USD/CNH, long NZD/USD, and selective long positions in Korean and Thai rates, along with a steepener in the Indian curve.
Report interpretation
Overview
The report discusses the energy price and physical supply shock triggered after the US-Iran conflict entered its seventh week. Asia, as a large net energy importer and in part reliant on energy from the Middle East, faces a dual pressure of price shocks and supply shocks. Nomura stresses that Asia should not be viewed as a homogeneous region: the shock will vary significantly depending on net energy exposure, energy mix, fiscal capacity, buffer factors such as inventories or AI demand, and different inflation starting points.
Core views
The key view is that growth risks are higher in Emerging Asia than in Developed Asia, with Thailand and the Philippines the most vulnerable. Taiwan is supported by AI demand, Singapore by tech demand, construction activity, and fiscal buffers, Malaysia is more resilient thanks to net energy exports and solid domestic demand, and China is relatively insulated due to coal self-sufficiency and the structure of its power system. On inflation, the Philippines, Australia, and New Zealand are expected to exceed target, and second-round effects are more likely in the Philippines, Singapore, and Australia. On policy, fiscal policy will lead the response, but India and Indonesia face a higher risk of fiscal slippage; on the central bank side, Australia, the Philippines, New Zealand, and Malaysia are more likely to hike, while China and Thailand are expected to stay on hold.
Analysis framework
The report uses a macro scenario and cross-country comparison framework, decomposing the energy shock into transmission channels such as prices, supply, corporate margins, consumer demand, financial conditions, confidence, tourism, and remittances. It then combines growth, inflation, fiscal space, and central bank reaction functions across 12 Asian economies to derive the economic divergence and the direction of FX and rates trades.
Methodology notes
Assess each economy's exposure to the shock based on energy exposure, energy mix, fiscal space, buffer factors, and inflation starting point.
Economies that are net energy importers, have high food and energy CPI weights, weaker fiscal space, and inflation already above target are more vulnerable; economies with coal self-sufficiency, renewable energy progress, AI demand, or strong inventory buffers are more resilient.
Compare fiscal slippage risk with central bank hiking risk.
India is more exposed to fiscal slippage risk, while the Philippines and Singapore face more monetary tightening risk; if the IDR keeps weakening, Bank Indonesia may be forced to hike.
Use a 2026 average Brent oil price of USD100/bbl as the negative scenario, compared with the base case of USD88.3/bbl.
The negative scenario is used to assess the marginal changes in growth downgrades, inflation upside, fiscal subsidy pressure, and rate responses.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- EUR/INRLong EUR versus INR
- Strengths
- India's fiscal risk, current account pressure, weak portfolio flows, and RBI dollar demand may weigh on the INR.
- Weaknesses
- If India's growth proves more stable or external capital returns, INR depreciation pressure may ease.
- Comparison
- Compared with some other Asian currencies, the INR faces fiscal, external account, and yield-curve pressure simultaneously.
- Risks
- A pullback in energy prices, a larger-than-expected fiscal spending compression, or stronger RBI intervention.
- SGD/IDRLong SGD versus IDR
- Strengths
- Indonesia's fiscal risks, balance of payments pressure, weaker reserve adequacy, and foreign-exchange control risk support the trade.
- Weaknesses
- If commodity prices improve Indonesia's terms of trade, some of the pressure could be offset.
- Comparison
- Singapore's fiscal and external stability is stronger than Indonesia's.
- Risks
- Stronger policy support for the IDR, a BI rate hike, or improved capital inflows.
- USD/CNHShort USD versus CNH
- Strengths
- China is relatively less affected by the energy war and is supported by a preference for a stronger renminbi, capital inflows, and political factors.
- Weaknesses
- If broad-based commodity prices rise and squeeze Chinese margins, support for the renminbi may weaken.
- Comparison
- Compared with economies that are more dependent on energy imports, China's coal self-sufficiency provides a buffer.
- Risks
- A stronger dollar, rising export pressure, or a longer-than-expected delay in China's easing policy.
- NZD/USDLong NZD versus USD
- Strengths
- A hawkish RBNZ, positioning factors, and foreign buying of bonds support the NZD.
- Weaknesses
- New Zealand inflation is above target and growth may also be hit.
- Comparison
- Compared with some Asian currencies, the NZD is more supported by hawkish central bank expectations.
- Risks
- A decline in global risk appetite, a stronger dollar, or a deterioration in New Zealand growth.
- KRW ratesReceive Korea Jun-5y NDIRS
- Strengths
- Moderate inflation, WGBI inflows, and pricing for excessive rate hikes support the receive position.
- Weaknesses
- If inflation or FX pressure is stronger than expected, yields may move higher.
- Comparison
- The Bank of Korea is in a gray zone, with the hike probability seen at 15-20%.
- Risks
- A prolonged energy shock, higher overseas rates, or stronger domestic demand in Korea.
- THB ratesReceive Thailand 5y NDIRS, relative to 50% US
- Strengths
- Growth risks, the BOT's low likelihood of hiking, high term premium, and limited fiscal risk support the trade.
- Weaknesses
- Thailand's tourism and growth remain under pressure, and downgrade risk still exists.
- Comparison
- Thailand and China are the two economies least likely to hike.
- Risks
- Further oil price increases, Thailand inflation above target, or higher external rates.
- INR rates curveSteepen the India 6m-5y curve
- Strengths
- Rising fiscal risk, ample liquidity provided by the RBI, and pricing for excessive rate hikes support the curve view.
- Weaknesses
- If fiscal compression or inflation pressure eases, the room for steepening is limited.
- Comparison
- India's risk is more about fiscal slippage than near-term central bank hikes.
- Risks
- Core inflation rising above 5%, CPI approaching 6%, or growth significantly stronger than expected triggering RBI hikes.
Key data
- Philippines 2026 inflation forecast4.9%Above the 2-4% central bank target range.
- Australia 2026 inflation forecast4.8%Above the 2-3% target range.
- New Zealand 2026 inflation forecast4.0%Above the 2% target midpoint.
- Singapore core inflation forecastrises from 1.4% in Q1 to 2.4% in Q4, 2026 average 2.1%Driven by energy, food costs, and a positive output gap.
- Philippines core inflation forecastrises from 3.0% in Q1 to 6.0% in Q4 2026Full energy pass-through lifts prices of dining, entertainment, personal care, and other energy-sensitive services.
- India fiscal slippage riskabout 0.6% of GDPRelative to the FY27 budget deficit target of 4.3% of GDP.
- Indonesia fiscal deficit pressurearound a 0.8% of GDP wideningIf 2026 Brent averages USD100/bbl, the deficit could exceed the government's 2.7% budget target.
- Australia hiking scenario25bp in MayThe report sees Australia as one of the central banks most likely to tighten.
- Philippines hiking scenario50bp in totalDue to inflation above target and pass-through risks.
- New Zealand hiking scenario25bp in Q4 2026, another 50bp in 2027The RBNZ response is more hawkish.
- Malaysia hiking scenario25bp in Q4 2026Driven by solid demand or inflation pressure.
- IDR-related policy risk40% probability of a Bank Indonesia rate hikeIf the IDR keeps weakening and foreign exchange reserve adequacy worsens, BI may be forced to hike.
Impact & implications
The investment implication of the energy shock is not simply to short Asia, but to capture economic and policy divergence. Economies with weaker growth, rising fiscal subsidy pressure, and external account strain are more likely to face pressure on currencies and bonds; economies with higher inflation and still-strong demand are more likely to tighten monetary policy; economies that are relatively insulated or supported by structural demand are more resilient.
Risks
- A de-escalation of the US-Iran conflict or a rapid fall in energy prices would weaken the energy shock assumed in the report.
- If Brent remains at USD100/bbl or higher for an extended period, fiscal subsidies, inflation, and growth pressures could exceed base-case expectations.
- The scale and form of fiscal intervention across Asian countries are subject to policy uncertainty, which could alter inflation pass-through and growth losses.
- If currencies such as the IDR weaken rapidly, central banks may be forced to hike earlier or by a larger amount.
- Credit downgrades, capital outflows, and changes in bond flows could amplify market volatility.
- The report text contains some OCR noise and truncation, so details for certain countries may be incomplete.
What to watch
- Whether Brent crude moves close to or remains above USD100/bbl.
- Whether core inflation pass-through expands in the Philippines, Australia, New Zealand, and Singapore.
- India's and Indonesia's fiscal deficits, subsidy spending, and whether other spending is being compressed.
- IDR performance, Indonesia's foreign exchange reserve adequacy, and Bank Indonesia's policy response.
- Whether China continues to delay monetary easing and whether it increases targeted fiscal support for pressured sectors such as airlines and manufacturing.
- Whether Thailand's tourism flow, growth data, and the BOT remain on hold.
- Foreign portfolio flows, WGBI-related inflows, Asian bond yields, and the US dollar trend.