Asia still at risk of ‘severe’ energy shock as US-Iran tensions persist, warns Aberdeen CIO

[SINGAPORE] Aberdeen is sounding the alarm on a “severe” energy supply shock that could take Asia years to recover from, as tensions escalate over the Strait of Hormuz after a US ultimatum to Iran.

The asset manager’s chief investment officer (CIO) Peter Branner told The Business Times in an interview during his visit to Singapore that the primary concern is not merely a transient disruption to oil flows, but lasting damage to regional energy infrastructure. This could take years to rebuild, keeping prices elevated well after hostilities end.

Aberdeen earlier assumed a base case of the conflict lasting one month, with oil prices averaging US$100 per barrel in March, but Branner noted this scenario now carries only a 40 per cent probability.

Recent developments have shifted the outlook towards a more adverse scenario where oil averages US$120 in April, either due to a prolonged conflict or ramped-up attacks on energy assets across the region.

Even if hostilities end, a return to normal production will take a significant time, added Branner.

Geopolitical divergence adds another layer of risk. “We are also closely following the difference between the US and the Israeli view on this conflict,” he noted. “While Israel may be eyeing a regime shift, it is a bit more unclear to what extent the Trump administration deems it is nearing the end of military activity.”

Asia faces short-term pain

While Aberdeen remains constructive on emerging markets over the medium term due to resilient macroeconomic fundamentals, relatively attractive valuations and further policy easing, the near-term outlook for Asia has deteriorated.

Japan, in Aberdeen’s view, is particularly exposed. “We have been positive on the Japanese economy,” said Branner. “Unfortunately, they are also heavily impacted by Iran, and the import of natural gas to Japan is an important thing to be mindful of.”

Singapore will not be spared either, as an open economy heavily reliant on energy imports.

“Our core scenario now is that this could drag on for months and that will surely impact the Singapore economy as well, as this is a supply shock to the economy,” he said. “The interesting question is, of course, how fast will it spill over to other parts of the economy? And unfortunately, that’s probably not going to take too long.”

This comes as redeploying tanker routes to alternative suppliers would require a lag of several months, he added.

Positioning for uncertainty

On portfolio positioning, Branner advised investors to stay diversified, even as rising correlations across asset classes blunt the benefits of diversification.

Gold remains a compelling hedge, he added, underpinned by continued central bank buying. The asset class also offers inflation protection – a factor that has received less attention amid the focus on near-term supply disruptions, Branner noted.

Aberdeen also sees the US dollar as a hedge, and revised its greenback view from “neutral” to “positive”, discarding its earlier thesis of a medium-term decline in favour of sustained US dollar strength through the crisis.

For investors who have yet to de-risk, Branner cautioned that the window may have already closed, shifting the focus to liquidity management.

“If you have not adjusted your risk level by now, it might unfortunately be too late – it is now about riding out the volatility,” he added. “You can withstand a period like this if you do not require immediate access to liquidity.”