
ASEAN equity markets have navigated a challenging 1H26, shaped by the Middle East energy shock, renewed US dollar strength following the Fed's hawkish rhetoric, and heightened geopolitical uncertainty. However, the macroeconomic backdrop is becoming increasingly supportive as oil prices retreat, inflation moderates and regional policy uncertainty declines, setting the stage for improving investor sentiment in 2H26.
The escalation of the US-Israel conflict with Iran disrupted ASEAN's economic outlook by driving oil, LNG, and freight costs higher. As most Southeast Asian economies are net energy importers, the surge in commodity prices widened current account deficits, raised inflation, and increased fiscal pressures through higher fuel subsidies. Alongside expectations of tighter US monetary policy, these developments weighed on regional currencies and prompted foreign investors to adopt a more cautious stance towards ASEAN assets.
Since then, conditions have improved materially. The temporary ceasefire and reopening of the Strait of Hormuz have removed much of the geopolitical risk premium embedded in crude oil prices, with Brent crude returning to pre-conflict levels. The decline in energy prices is easing inflationary pressures, improving external balances, in turn supporting a recovery in consumer purchasing power and corporate profitability across the region.
Although the ceasefire remains fragile and geopolitical risks persist, our base case is that oil supply disruptions will remain contained. Barring a material escalation that threatens energy infrastructure or shipping through the Strait of Hormuz, energy prices are likely to remain well below their conflict-driven peaks.

Importantly, most ASEAN central banks have largely completed their monetary tightening cycles. With inflation now moderating and economic growth stabilising, policymakers are increasingly focused on supporting domestic demand rather than containing price pressures. This policy stability should allow regional interest rates to remain broadly accommodative, providing a more supportive backdrop for earnings growth and equity valuations.
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