Morgan Stanley downgrades India as US-Iran war rattles Asia
What's the story
Global investment bank Morgan Stanley has downgraded its outlook for Indian equities, citing the ongoing Iran conflict as a potential risk to regional supply chains. The firm has downgraded India's rating from "overweight" to "equal-weight," given its heavy dependence on liquefied natural gas (LNG) supplies from Qatar. This move comes as part of a broader shift in the bank's strategy toward Asian equities.
Strategic shift
Asia's dependence on Middle Eastern energy supplies
Morgan Stanley's strategists, Daniel Blake and Jonathan Garner, have emphasized Asia's heavy reliance on energy supplies from the Middle East. They wrote in a note dated March 5, "Asia remains critically dependent on Middle Eastern supply of crude oil, refined products and LNG and we believe the market is too complacent about supply chain risks." This observation underlines their cautious approach toward Asian equities amid ongoing geopolitical tensions.
Supply chain vulnerability
India's reliance on oil shipments through the Strait of Hormuz
India, a major energy importer, heavily relies on shipments through the Strait of Hormuz. This key maritime chokepoint sees nearly 20% of global oil and over 40% of India's crude imports. Morgan Stanley's strategists have warned that if shipping flows through this passage remain disrupted amid the Iran conflict, it could lead to rising costs and supply shortages for energy-importing Asian economies.
Economic implications
Potential impact on corporate earnings and economic growth
The strategists have warned that continued disruption of shipping flows through the Strait of Hormuz could lead to increased costs and supply shortages for energy-importing Asian economies. This, in turn, could negatively impact corporate earnings and economic growth. The potential fallout from these disruptions highlights the interconnectedness of global supply chains and the far-reaching consequences of geopolitical conflicts on regional economies.
Investor caution
Foreign investors pull out $1.3 billion from Indian equities
Since the Iran conflict began, foreign investors have pulled out some $1.3 billion from Indian equities, Morgan Stanley said. Other major Asian markets have seen even larger withdrawals with South Korea witnessing about $1.6 billion worth of equities being sold this week and Taiwan witnessing approximately $7.9 billion in outflows. This trend highlights a wider risk aversion across emerging Asia amid escalating geopolitical tensions in the region.