Asian Stock Mostly Slipped – Historic Oil Surge The Key Reason
The Russia -Ukraine war is not just devastating but has caused disruptions in Eastern Europe. The disruptions are now spilling over to Asian markets. The war has triggered foreign outflows in countries such as South Korea, India, China, Thailand, and Vietnam. It has resulted in a sharp rise in the prices of oils and associated products which are impacting the stock markets.
Studies show that a positive relationship exists between the stock market index and oil prices. However, what is happening in the Asian market is contrary to the expectations. Higher oil prices are impacting the stock prices negatively.
Note that the Asian stock markets are badly affected because of the following reasons:
- The continent has low stock market capacity
- Asia has undeveloped infrastructure
- Asia has uncountable barriers that hinder stock market development.
Thus, the slip in prices has exposed the vulnerability of stock markets in the affected countries. The oil price surge has affected the Asian stocks. It has resulted in foreign outflows from the market equities and led to depreciation of their currencies.
Weakening of currencies
Countries that import oil from East Europe have been badly impacted by sanctions imposed on Russia. It explains why stock prices in countries such as India, Vietnam, China, and Thailand are tumbling. The sanctions mean that Russia cannot bring their oil to the market. So countries that depend on Russia for oil are forced to buy the products elsewhere at a higher price of $139 a barrel. This has weakened their local currencies and triggered foreigners to want to dispose of shares in the local companies.
Inadequate supply of oil means that industries cannot operate at full capacity. This has reduced production, sending signals to foreigners to start selling their stocks. They fear that some companies may be forced to scale down operations. The effect is that more sellers are willing to dispose of shares than the available buyers. It has resulted in a drop in the prices of stocks, especially in the companies affected.
Shareholders fear that the prices of stocks are likely to fall even further. Therefore, the majority of them are disposing of them to avoid losses. Stock traders and brokers have noted the downward trends and have decided to short sell to profit from the scenario. Click here for details.
The inflation risk is high in countries that are vulnerable to Brent Crude price surges. Notice that most Asian markets are experiencing rising commodity prices following an upsurge in Brent oil prices. Also, most of them are experiencing slowed growth rates, which is further impacting the price of stocks. So as the price of oil rises, the prices of other products that directly or indirectly depend on oil are likely to go up. This has forced governments to intervene to try and control the effects of inflation. One of the intervention strategies is downgrading their stocks, which is further making the stock prices slip.
Other countries such as South Korea and India are witnessing a massive foreign sell-off. The reason for this is that depreciation of their local currencies against the dollar means that holding more stocks reduces the investor’s net worth. For instance in South Korea, the local currency has depreciated by over 3 % against the US. Dollar since Russia invaded Ukraine. So foreigners are quickly disposing of the stocks to reduce loss of value.
Loss of tourism revenues
Some Asian countries such as Thailand depend on tourism. So they are now finding themselves in a tight corner after Russian tourists stopped visiting their countries due to economic sanctions. The effect is that the economies of such countries are slowed down. The constricting economies have made stock prices plummet.
Although the stock market and the oil prices have a positive relationship globally, the scenario is quite different in Asian countries. Analyzing the price of stocks and oil prices in these countries show that the world oil price index and the stock market index are negatively related. So as the price of oil rises, it is expected that the price of stocks in Asian countries will plummet. Therefore, it is only reasonable for shareholders to sell off their stocks before they dip further.