Asian equity markets fell sharply on Wednesday as traders reduced exposure to chipmakers and other large-cap technology names amid growing concern that the war in the Middle East could prompt an oil shock, lift inflation and postpone expected interest rate cuts.
MSCI’s broadest index of Asia-Pacific shares outside Japan slid 4.2%. In South Korea, selling pressure pushed the KOSPI into a circuit breaker after the index dropped more than 11% in the session, bringing two-day losses to 17% at the time. Japan’s Nikkei declined 4.3%, while Taiwan’s benchmark retreated 3.6%.
Market strategists and dealers said the rout was driven largely by foreign outflows and a rapid unwinding of crowded positions in large-cap technology stocks that had led regional rallies earlier in the year.
"We are definitely seeing foreign outflows driving the move, particularly in the large-cap tech names that had led the rally year-to-date. Korea had been one of the strongest markets globally, up nearly 50% at its peak on the back of the AI and memory cycle, so positioning was crowded.
This looks more like a positioning unwind and risk reduction rather than a fundamental deterioration in earnings. When oil spikes and FX volatility jumps, especially for oil-importing markets like Korea and Japan, global funds tend to de-risk quickly from the most liquid index heavyweights. That’s exactly where the selling has been concentrated: Samsung, SK Hynix and other large caps.
There is also a clear macro overlay. Higher oil prices raise concerns about inflation and could delay Fed easing, which hits high-beta tech and cyclical names disproportionately. So yes, part of this is profit-taking, but it’s more broadly a global risk-off move rather than investors permanently moving to cash."
- Tareck Horchani, Head of Prime Brokerage Dealing, Maybank Securities, Singapore
Horchani added that domestic institutional accounts were not uniformly selling and that some were redeploying capital into defensive and defence-related names rather than participating in indiscriminate liquidation across sectors.
"The Kospi’s 15% two-day collapse is a textbook momentum unwind, not a structural break .... when U.S.-Israeli operations practically closed the Strait of Hormuz, there were no diversified bids to absorb the selling. The order book evaporated. Foreign investors pulled over US$7 billion in two sessions.
The biggest upside catalyst is the record hedge fund short book. According to Goldman’s prime brokerage, shorts outpaced longs two-to-one in early February. If tensions ease quickly, a violent squeeze could follow. Samsung and SK Hynix remain healthy businesses."
- Christopher Forbes, Head of Asia and Middle East, CMC Markets
Other strategists pointed to Asia’s specific vulnerability to disruptions in Middle East shipping lanes and energy flows, and to extreme momentum positioning that amplified losses once selling pressure began.
"The impact on Asian markets has been higher because Asian economies are more vulnerable to the Strait of Hormuz closure and because in the run-up to the war, momentum trends were very sharp in many parts of Asia such as Korea.
For markets to find a floor, we need signs of de-escalation on the war front or status quo which could then move the focus back to fundamentals. It is difficult to time such geopolitical events but given the positioning was extreme on the way up, it would take some time for things to normalize."
- Rupal Agarwal, Asia Quant Strategist, Bernstein, Singapore
Economists flagged where pressure on prices and currencies might be felt first in the region if oil and energy costs rise further.
"Amongst the ASEAN-6 countries, the net oil trade balance is most adverse in Thailand, Malaysia, and Vietnam (as % of GDP), with the pass-through to price pressures most material in Thailand and the Philippines. Additionally, while less strategic, Thailand and Singapore are top LNG buyers in the region, but with a well-distributed supplier mix, especially in Singapore.
Much of the region will likely monitor developments in the Middle East with trepidation. THB, MYR, and SGD are down more than 1% this week, and regional currencies might underperform if the U.S. dollar stays bid. Regional central banks are unlikely to act pre-emptively on policy, preferring to remain on hold while maintaining a keen watch on the domestic currency and bond yield movements."
- Radhika Rao, Senior Economist, DBS Bank, Singapore
In Japan, strategists said the narratives and policy expectations that had bolstered equities were under fresh strain as higher energy costs and inflation risk forced market participants to re-evaluate profit and policy outlooks.
"Up to now, the market has been bought up on narratives like ’Takaichi’s policies’ and expectations of double-digit profit growth next fiscal year. But both of those pillars are wobbling. This isn’t the moment to be talking about investing on the back of ’Takaichi policies.’ If the priority shifts to measures against higher prices and higher crude oil — things that have to be dealt with first — then you run out of money.
And corporate earnings, too: if elevated oil prices persist, profits are obviously going to be squeezed. In other words, the premises we’ve been relying on no longer hold. Seen that way, I wouldn’t call 54,000 yen ’oversold’. I don’t think it just keeps falling forever. It’ll find a level where it stabilises somewhere—but whether that’s 54,000, 52,000, 50,000, or some level on Korea’s KOSPI, we simply can’t say at this point.
Across a broad range of sectors, a lot of investors had been looking for a point to take profits. But there hadn’t been a clear trigger for a serious downturn, and that backdrop persisted. Now, all at once, profit-taking selling has ballooned."
- Shingo Ide, Chief Equity Strategist, NLI Research Institute, Tokyo
The sudden drop concentrated selling in highly liquid index-heavy stocks, particularly chipmakers and other large-cap technology names, while domestic investors in some markets moved to buy selectively and rotate into defensive sectors. Market participants noted that if geopolitical tensions ease quickly, the large short positions held by hedge funds could trigger a sharp rebound, but the near-term outlook remained uncertain and sensitive to developments in the Middle East.
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