Falling oil prices ease pressure on Asia, while the AI export boom remains the main growth theme

Overview

This report discusses three main themes in Asia's macro and market outlook: the sharp decline in oil prices provides a buffer for the world's largest energy-importing region, the dollar has strengthened again as the Fed turned more hawkish, and AI and tech capex continue to drive exports, equities, and growth in parts of Asia. The report believes that lower oil prices and easing policy pressure have improved the growth outlook again, but inflation pass-through, food prices, monetary tightening, and weak domestic demand in China remain major constraints.

Core views

The core views include: first, expectations for the reopening of the Strait of Hormuz and US-Iran negotiations have driven a sharp decline in oil prices, reducing imported energy pressure in Asia; second, the inflation shock is narrower and shorter than in 2021-22, and inflation in most Asian economies remains within or near target ranges, though core and food inflation may rise with a lag; third, the AI investment cycle continues to support export-oriented economies such as South Korea, Taiwan, China, Malaysia, and Singapore, with the key question being whether the export and equity market boom can spill over into domestic demand; fourth, growth forecasts for India and South Korea have been revised higher, while some ASEAN economies remain affected by the lagged impact of earlier oil prices and monetary tightening; fifth, China's exports are strong but domestic demand is weak, and policy places greater emphasis on a price-based monetary policy framework, rules-based opening of the capital account, and RMB internationalization; sixth, Asian central banks as a whole remain conservative or hawkish, while fiscal policy may adjust subsidies and stimulus arrangements in the second half as oil prices fall.

Analysis framework

The report uses a top-down regional macro framework, combining oil prices, the dollar, Fed policy, AI capex, Asian exports, inflation, central bank policy, and fiscal policy to assess the linked impact on growth, interest rates, exchange rates, equity markets, and bond markets.

Methodology notes

• Macro transmissionEnergy price and inflation pass-through analysis

  Oil price shocks affect inflation in Asia through fuel, chemicals, food, and FX channels.

  The report compares this round of energy shock with that of 2021-22 and points out that this shock is narrower and shorter, with more adequate inventory and fiscal policy buffers, making it more likely to slow inflation normalization rather than trigger a renewed sharp rise.

• Growth analysisExports and domestic demand decomposition

  Separately assess strong exports driven by external demand and weak domestic consumption and investment.

  The report particularly emphasizes that China has strong exports and industrial production, but weak retail sales, fixed asset investment, and property-related demand, indicating that domestic demand is growing only at a low pace.

• Supply chain analysisAI capex and Asian supply chain mapping

  AI capex by US cloud providers drives exports from Asia's AI equipment supply chain.

  The report notes that expected 2027 capex by the five major US cloud providers is approaching US$1 trillion, Asian supply chain participants' exports are surging, and this is supporting trade surpluses in South Korea, Taiwan, China, Malaysia, and Singapore.

• Policy analysisCentral bank and fiscal policy path tracking

  Track monetary tightening tendencies and fiscal subsidy adjustments simultaneously.

  The report tracks the central bank stance of economies including Japan, Australia, New Zealand, the Philippines, Indonesia, South Korea, India, Thailand, Malaysia, and Taiwan, China, and discusses changes in fiscal subsidy and stimulus room after oil prices fall.

Asset mapping & comparison

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

• Japan, South Korea, Taiwan, China, and China A-shares

  Preferred in equity strategy

  Strengths

  Supported by AI, the tech cycle, policy, and market momentum, and strategists recommend continuing to hold the winners.

  Weaknesses

  Equity market volatility has risen recently, and changes in global Fed policy and AI investment sentiment could amplify volatility.

  Comparison

  Preferred relative to several Southeast Asian markets.

  Risks

  Downward revisions to AI capex expectations, a stronger dollar, regional central bank tightening, or renewed geopolitics.

• Several Southeast Asian equity markets

  Underweight in equity strategy

  Strengths

  Lower oil prices help ease imported pressure.

  Weaknesses

  Indonesia, the Philippines, Thailand, and Vietnam are still affected by the lagged impact of high oil prices and monetary tightening.

  Comparison

  Less attractive than Japan, South Korea, Taiwan, China, and China A-shares.

  Risks

  Sticky inflation, further monetary tightening, slower external demand, and FX pressure.

• 30-year Indian government bonds

  Positive fixed income view

  Strengths

  Supported by an improved macro backdrop, RBI FX measures, and potential index inclusion.

  Weaknesses

  India may still raise rates at year-end, and long-duration bonds are sensitive to higher rates.

  Comparison

  The report says it is slightly more constructive on fixed income after easing price pressure.

  Risks

  Reaccelerating inflation, an oil price rebound, policy rate hikes, or reversal in capital flows.

• THB/INR

  FX short recommendation

  Strengths

  Reflects RBI measures, current account dynamics, INR valuation being better than higher-yielding EM currencies, and differences in policymakers' FX preferences between the two countries.

  Weaknesses

  This trade depends on the persistence of relative policy and external account differentials.

  Comparison

  The report also maintains its short SGD/MYR recommendation.

  Risks

  Unexpected THB strength, weaker policy support for INR, or reversal in oil prices or the dollar.

• SGD/MYR

  FX short recommendation

  Strengths

  The report believes MYR will rebound on positive fundamentals if there is no early general election.

  Weaknesses

  Uncertainty around state-level elections in Malaysia has recently weighed on MYR.

  Comparison

  Part of the same regional FX theme as short THB/INR.

  Risks

  Escalating political risk in Malaysia, stronger-than-expected SGD resilience, or declining global risk appetite.

• Brent crude and refined products

  Macro input variable

  Strengths

  The decline in oil prices significantly eases Asia's energy import pressure.

  Weaknesses

  Oil prices remain slightly above pre-war levels, and refined product margins may stay high due to damage to Gulf and Russian facilities.

  Comparison

  Has fallen sharply relative to the end-April peak.

  Risks

  Obstacles to reopening the Strait of Hormuz, escalating geopolitical conflict, or slower-than-expected facility repairs.

Key data

• Brent crude priceDown from about US$120/bbl to US$72/bblFell from the end-April peak to the level at the time of writing.
• Goldman Sachs commodities team's Brent forecastUS$80/bbl in 4Q 2026The report says that although oil prices have fallen sharply, they remain slightly above pre-war levels, and refined product margins may stay wide.
• Philippines CPI inflation7.2% YoYThe report says the Philippines is one of the economies with poorer inflation outcomes, partly because energy subsidies are limited.
• Expected AI capex of the five major US cloud providersApproaching US$1 trillion in 2027Consensus expectations continue to be revised higher, supporting exports from Asia's AI equipment supply chain.
• Trade surpluses of South Korea, Taiwan, China, Malaysia, and SingaporeAll exceeded 10% of GDP over the past three monthsRelated to strong exports from the AI equipment supply chain.
• India GDP growth forecast6.8%Goldman Sachs raised its full-year forecast by 30bp due to better-than-expected momentum and reduced pressure for retail fuel price increases.
• China May retail sales-0.6% YoYThe report says this was only the second YoY contraction on record, reflecting the fading of trade-in subsidy programs and oil price pressure.
• China May fixed asset investment-4.1% YoYSuppressed by the property downturn and tight local government finances.
• China May exportsMore than 19% YoY growthThis drove industrial production growth of 4.5% YoY and generated a monthly trade surplus of over US$100 billion.

Impact & implications

For investors, lower oil prices reduce macro tail risks in Asia and support a more constructive view on some equity markets and long-duration bonds; the AI capex cycle continues to strengthen the external-demand advantage of supply-chain economies such as South Korea, Taiwan, China, Malaysia, and Singapore; however, a strong dollar and hawkish central banks may limit the easing in financial conditions, and some ASEAN economies are still dragged by the earlier oil shock and monetary tightening. China, meanwhile, shows a divergence of strong exports and weak domestic demand, with policymakers remaining patient and RMB internationalization advancing more quickly.

Risks

• Oil prices or refined product prices may rise again due to geopolitics, developments in the Strait of Hormuz, or facility damage.
• The dollar may continue strengthening as the Fed remains hawkish, increasing pressure on Asian exchange rates and financial conditions.
• Energy costs may pass through to core inflation, chemical prices, and food prices, causing inflation normalization to be slower than expected.
• Further tightening by Asian central banks may drag on consumption, investment, and asset prices.
• AI capex expectations or tech export momentum may fade, weakening support for economies such as South Korea, Taiwan, China, Malaysia, and Singapore.
• China's domestic demand may remain weak, while the property downturn and local fiscal constraints continue to weigh on investment.
• Regional elections and political uncertainty may affect fiscal policy, subsidy policy, and FX performance.

What to watch

• Brent crude and refined product prices, as well as progress on reopening the Strait of Hormuz.
• The impact of Fed policy, Chair Warsh's comments, and changes in FOMC rate expectations on the dollar.
• Asian core inflation, food inflation, and the transmission path of energy and FX pass-through.
• Expected AI capex of the five major US cloud providers, and export data for Asia's AI equipment supply chain.
• Whether trade surpluses in South Korea, Taiwan, China, Malaysia, and Singapore can translate into improved domestic demand.
• China's retail sales, fixed asset investment, property market, local government special bond issuance, and RMB internationalization policy.
• The policy paths of central banks in Japan, South Korea, India, Australia, New Zealand, the Philippines, Indonesia, Thailand, Malaysia, and Taiwan, China.
• Fiscal subsidies, tax cuts, and spending adjustments in Japan, South Korea, China, and Southeast Asia.