UBS believes that if the Middle East conflict drags on, Asia-Pacific markets will enter a differentiated landscape of "higher for longer" energy prices

Overview

This report discusses the impact of a protracted Middle East conflict on Asia-Pacific markets. UBS believes the most important investment assumption is "higher for longer" energy prices, especially oil prices remaining stable at or above US$90-100/bbl, accompanied by the risk of supply disruption in the Strait of Hormuz and limited spare capacity. The report emphasizes that oil prices are not merely an input cost variable, but transmit through inflation expectations, fiscal policy, current accounts, interest rates, corporate earnings resilience, and equity valuations.

Core views

The core view is that Asia-Pacific markets will not decline uniformly; rather, relative performance will diverge significantly. Investors should rotate away from consumption- and financing-sensitive exposures toward energy, energy-adjacent, energy security, materials, shipping, and companies with strong balance sheets and pricing power. China is relatively advantaged due to its diversified energy mix, manageable price pass-through, and greater policy room; Japan is defensive because of stronger corporate balance sheets and pricing power; Australia benefits from its stable-market characteristics and net energy exporter status. India, Thailand, and some ASEAN consumer economies are most affected by high oil prices, inflation, limited fiscal room, and currency pressure.

Analysis framework

The report uses scenario stress testing and cross-sector, cross-country comparisons to analyze the transmission paths of high oil prices into earnings, valuations, and macro variables, and combines this with stock-level EPS sensitivity tables to higher oil and gas prices to identify companies and sectors with greater upside and downside risks.

Methodology notes

• Scenario analysisSustained high oil price scenario

  Oil prices remain at or above US$90-100/bbl for longer

  By assuming prolonged Middle East tensions, ongoing supply disruption risks, and limited spare capacity, the report assesses the sensitivity of Asia-Pacific countries' current accounts, inflation, fiscal balances, interest rates, and corporate earnings.

• Sector rotationEarnings sensitivity and cost pass-through

  Upside and downside EPS shocks from high oil prices

  It compares the earnings elasticity, cost pass-through ability, and policy constraints of sectors including upstream energy, materials, shipping, airlines, autos, consumer, and financials under high oil prices.

• Regional allocationComparison of relative resilience at the country level

  Energy import dependence, policy buffers, and market structure

  It judges the relative degree of benefit or pressure across Asia-Pacific markets based on net energy exporter or importer status, fiscal room, inflation pass-through, corporate balance sheets, and sector composition.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Upstream energy and oilfield services

  Primary beneficiary

  Strengths

  Higher oil and gas prices directly boost revenue and earnings, while some companies benefit from low production costs, U.S. dollar revenues, and output growth support.

  Weaknesses

  They may be affected by taxes, policy intervention, capital expenditure discipline, and geopolitical volatility.

  Comparison

  Compared with airlines, consumer, and real estate, earnings elasticity is stronger in a high oil price environment.

  Risks

  Falling oil prices, easing supply shocks, government intervention, or project execution risk.

• Coal, energy alternatives, and energy security-related stocks

  Indirect beneficiary

  Strengths

  They benefit from uncertainty in natural gas supply, energy security demand, and delays in the pace of the energy transition.

  Weaknesses

  They still face long-term pressure from the energy transition and environmental policies.

  Comparison

  The report views them as an energy security hedge rather than a pure cyclical trade.

  Risks

  Policy changes, declining demand, and regulatory constraints.

• Chemicals and fertilizers

  Differentiated

  Strengths

  Companies with cost pass-through ability, specialty material advantages, overseas capacity exits, or non-Middle East naphtha feedstock sources are more resilient.

  Weaknesses

  Higher feedstock and logistics costs squeeze margins, while fertilizers are affected by second-order food inflation and pressure across the agricultural chain.

  Comparison

  Not all chemical companies are hurt; market structure and pricing power matter more than oil prices themselves.

  Risks

  Further increases in feedstock prices, weak demand, and inability to pass through costs.

• Banks and non-bank financials

  Banks relatively resilient, non-bank financials under pressure

  Strengths

  Banks with strong deposit bases, diversified income, and adequate capital are better able to withstand high interest rates and credit-cycle pressure.

  Weaknesses

  NBFCs are more affected by rising funding costs, margin compression, and deterioration in borrower quality.

  Comparison

  Banks are preferable to non-bank financials, but the financial sector overall is still affected by higher bond yields and slower credit growth.

  Risks

  Persistent inflation, worsening asset quality, and further increases in interest rates.

• Airlines, transportation, and logistics

  Primary loser

  Strengths

  Some normalization in demand may provide support, but not enough to offset the fuel cost shock.

  Weaknesses

  Rising fuel costs directly compress profits, and fuel hedging offers limited protection in a prolonged US$100 oil scenario.

  Comparison

  Compared with shipping, airlines and land transport are less able to benefit from rerouting, higher ton-miles, and rising insurance costs.

  Risks

  Further upside in oil prices, slower demand, currency depreciation, and insufficient fare pass-through.

• Shipping

  Selective beneficiary

  Strengths

  Benefits from rerouting, higher ton-miles, and rising insurance premiums.

  Weaknesses

  Affected by freight rate cycles, port congestion, and global trade demand.

  Comparison

  Within transportation, shipping is superior to airlines and fuel-cost-intensive logistics.

  Risks

  Easing conflict, increased capacity, and declining trade volumes.

• Consumer, real estate, and high-valuation growth stocks

  Under pressure

  Strengths

  Staples with strong pricing power are relatively defensive, especially some Japanese food and beverage companies.

  Weaknesses

  Fuel and food inflation erode consumer purchasing power, while high interest rates and financing conditions pressure real estate and high-valuation growth stocks.

  Comparison

  Compared with energy and materials, consumer and real estate lack a natural hedge.

  Risks

  Persistent inflation, declining consumer confidence, and tighter financing conditions.

• Australian energy stocks

  Structural beneficiary

  Strengths

  As a geopolitically stable net energy-exporting market, Australia’s energy companies benefit from prices and U.S. dollar revenues.

  Weaknesses

  Consumer, REITs, and interest-rate-sensitive sectors still face inflation and rate pressure.

  Comparison

  Australia overall is relatively better positioned than most energy-importing Asian markets.

  Risks

  Falling commodity prices, project and regulatory risks, and reversal of capital inflows.

Key data

• Core oil price scenarioUS$90-100/bbl or aboveThe UBS team uses this range as the main stress-test scenario if the Middle East conflict drags on.
• Examples of stocks with upside EPS sensitivitySK Innovation 2026E +150.0%, Zhejiang Satellite 2026E +83.0%, Woodside Energy 2026E +63.0% / 2027E +108.0%From the report's table of stocks most positively impacted on EPS by rising oil and gas prices.
• Examples of stocks with downside EPS sensitivityTata Motors Passenger Vehicles 2026E -805.0%, HPCL 2026E -330.0%, InterGlobe Aviation 2026E -265.0%Shows the significant negative sensitivity of autos, fuel marketing, and air transport to a high oil price scenario.
• Relatively benefiting regionsChina, Japan, AustraliaThe reasons differ: China has policy and energy-structure buffers, Japan has corporate resilience, and Australia is a stable net energy-exporting market.
• Relatively vulnerable regionsIndia, Thailand, the Philippines, and some consumption-driven ASEAN marketsMainly affected by dependence on imported energy, inflation pass-through, limited fiscal room, currency pressure, and pressure on consumption.

Impact & implications

The investment implication is to emphasize rotation rather than retreat. High oil prices will widen earnings divergence across Asia-Pacific countries, sectors, and individual stocks; positioning should favor upstream energy, energy security, selected materials, shipping, and companies with strong pricing power and solid balance sheets, while avoiding exposures that are fuel-cost intensive, consumption-sensitive, financing-sensitive, highly leveraged, or at higher risk of policy intervention.

Risks

• The path of the Middle East conflict and the probability of supply disruption remain uncertain, and oil prices may come in below the stress-test scenario.
• High oil prices may bring inflation, fiscal pressure, deterioration in current accounts, currency volatility, and rising interest rates.
• Emerging market investing faces risks from abrupt changes in currencies, regulation, sociopolitical conditions, cost of capital, and growth outlook.
• Policy intervention, subsidies, price controls, and tax arrangements may alter how oil prices transmit to company earnings.
• Historical performance and ratings in the disclosure table do not guarantee future returns, and the related views may be adjusted as market conditions change.

What to watch

• Whether oil prices remain at or above US$90-100/bbl.
• Whether supply disruption risks in the Strait of Hormuz and the Middle East escalate.
• Inflation, fiscal subsidies, exchange rates, and interest-rate policy responses across Asian countries.
• Internal performance divergence within China between energy, materials, shipping and airlines, consumer, and real estate.
• Earnings and policy risks for Indian fuel marketing companies, NBFCs, and consumer-related sectors.
• Whether Australian energy exporters, LNG, and resource stocks continue to attract relative capital inflows.
• Changes in shipping rerouting, insurance costs, ton-miles, and global trade demand.