US-Iran Conflict Escalates, Asia-Pacific Stock Indices Decline Broadly, Thailand's SET Index Plummets 4.04%

Southern Finance Reporter Hu Huiyin reports

The impact of the US-Iran conflict continues. During the Asia-Pacific trading session on Monday, March 2, most Asia-Pacific stock indices declined.

On March 2, the MSCI Asia-Pacific Index fell by 1.65%. Overall, military stocks rose, aerospace stocks declined, energy stocks gained, cryptocurrencies continued to fall, and gold’s safe-haven properties are now prominent.

That day, Australia’s S&P/ASX 200 index was the only Asia-Pacific stock index to rise, up slightly by 0.03%, closing at 9,200.9 points.

Other Asia-Pacific stocks declined to varying degrees. In Japan, the Nikkei 225 index closed down 1.35% or 793.03 points, at 58,057.24 points. In Southeast Asia, Thailand led the declines, with the SET index down 4.04% to 1,466.51 points; the FTSE Singapore Strait Index fell 2.09% to 4,890.86; Indonesia’s Composite Index dropped 2.66% to 8,016.83; Vietnam’s Ho Chi Minh Index declined 1.56% to 1,851.09; the Philippines Manila Index rose 2.79% to 6,426.83; and the FTSE Malaysia KLCI fell 0.96% to 1,700.21. Additionally, South Korea’s stock market was closed for a holiday.

Li Huihui, a management practice professor at Lyon Business School in France, told 21st Century Business Herald that the Asia-Pacific markets experienced a full-scale plunge. While the immediate trigger appears to be the escalation of the US-Iran conflict causing a “stress-induced” safe-haven trading, the deeper logic lies in global capital urgently re-pricing the “stagflation risk.” Any turbulence in the Middle East directly threatens the Strait of Hormuz, a critical global energy chokepoint. In market interpretation, this is not just a geopolitical crisis but a deadly hidden risk of inflation resurgence.

Japan and South Korea Stocks May Remain Highly Volatile

On the 2nd, the Nikkei index initially plunged more than 1,500 points in the morning but later narrowed its decline to below 1,000 points.

Li Huihui believes this mainly results from algorithmic selling by quantitative funds and the unwinding of previous profit-taking, creating a resonance effect that led to a sharp market decline. Previously, Japanese stocks were already at relatively high valuations, with leveraged trading quite crowded. When external “black swan” events occur, foreign capital withdrawal and margin calls intensify, triggering a stampede-like fall. The decline later narrowed, indicating that domestic long-term or “national team”-like stable funds entered to support the market, believing that excessive panic created short-term misjudgments and began to buy in batches.

“Early morning, the Nikkei’s large decline was because Japan relies on Middle Eastern imports for 90% of its oil. The US-Iran conflict directly impacts its energy security, and rising inflation expectations drag down corporate profits, causing panic selling,” said Xiang Haoyu, a specially appointed researcher at the China Institute of International Studies’ Asia-Pacific Department. The subsequent narrowing of the decline to within 1,000 points was mainly due to the US signaling some easing, and after panic selling subsided, funds began to allocate to defensive sectors like energy and military, combined with the Bank of Japan’s policy expectations remaining stable, leading to technical recovery. South Korea’s stock market was closed today for a holiday; it may rebound after reopening or experience a slight correction. However, its economy is less dependent on Middle Eastern energy, and with stronger domestic demand policies, its decline may be more moderate.

He believes that the Nikkei index will remain volatile in the short term. If the conflict does not escalate further, energy sectors and safe-haven funds will support a gradual stabilization. If the situation worsens, rising import costs for energy will continue to pressure the market.

Looking ahead, Li Huihui thinks high volatility may become the norm for Japan and South Korea stocks. “Both are typical export-oriented economies with ‘two ends outside,’ highly dependent on energy imports. If the US-Iran conflict causes a long-term rise in global energy prices, trade conditions for these countries will deteriorate rapidly, and imported inflation pressures will intensify. In the short term, market investment themes may shift forcibly from previous focus on semiconductors and tech growth sectors to defensive sectors like inflation hedges and high dividends.”

Southeast Asian Indices Lead Declines

Among Asia-Pacific markets, Southeast Asian stocks declined more significantly.

Wang Xin Jie, chief investment strategist at Standard Chartered China Wealth Solutions, told 21st Century Business Herald that compared to Japan, Southeast Asian markets are more sensitive to changes in investor confidence. The global investment sentiment decline triggered by Middle Eastern tensions exerts a more pronounced adjustment pressure on these emerging markets.

Li Huihui believes that the deep reason for the sharp decline in Southeast Asia is the exposure of their fragile external balance and inflation structures under external shocks. The Philippines led the decline mainly because food and transportation (energy) make up a large part of its CPI, and there are concerns that a sharp rise in energy prices will quickly push up inflation, forcing the central bank to adopt more aggressive tightening policies, which will significantly dampen its already weak economic growth. Thailand and Indonesia face similar issues. Thailand’s economy currently relies heavily on tourism recovery, but rising airline costs and geopolitical risk aversion will directly reduce international tourist arrivals. Indonesia, with its commodity export advantage, can somewhat hedge against external shocks, but under the backdrop of strong external risk aversion, the pressure of capital outflows remains significant. Singapore, as a financial hub and capital center in Asia, experienced a major market adjustment mainly reflecting overall foreign capital withdrawal expectations. When external liquidity tightens, these high foreign-dependence emerging markets are often hit hardest and face the most pressure.

What’s Next for Asia-Pacific Markets?

“Short-term, Asia-Pacific markets will remain in a phase of oscillation and adjustment. The US-Iran conflict is the key variable,” said Xiang Haoyu. “If both sides send more signals of easing, oil prices will fall, safe-haven sentiment will ease, and markets will see technical rebounds. Markets with low energy import dependence and high domestic demand will recover faster. If the conflict escalates into a prolonged war, the continued blockage of the Strait of Hormuz and sustained high oil prices will push up global inflation expectations, delay central bank rate cuts, and put ongoing downward pressure on Asia-Pacific stocks, especially energy-importing economies like Japan, South Korea, and Southeast Asia.”

Xiang further states that in the medium to long term, the divergence among Asia-Pacific markets will intensify. Resource-exporting countries like Australia will benefit from rising commodity prices and perform relatively resiliently, while markets highly dependent on Middle Eastern energy and with high foreign investment ratios may experience longer adjustment cycles.

Wang Xin Jie also notes that in the short term, the uncertainty surrounding Middle Eastern tensions will keep global and Asia-Pacific stock volatility high. “But looking ahead, as the dollar’s return flow slows and with the valuation discount effect in the Asia-Pacific region, market risk appetite may recover, attracting more cross-border capital reallocation.”