Notwithstanding a short-term correction, we believe it is premature to call an end to the long-term equity bull market that began in 2022 for several reasons.

Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore

Since we moved our overall position in equities to neutral as a risk‑management measure on 12 March 2026, equity markets corrected further as uncertainties surrounding the Iran war continued to escalate. The US has agreed to a two-week ceasefire in return for Iran reopening the Strait of Hormuz but a long-term agreement to end the war still needs to be negotiated. We believe the market outlook is likely to remain volatile in the near term, and therefore remain in risk‑management mode within our tactical asset allocation, focusing on risk hedging, effective diversification, and enhancing portfolio resilience.

Notwithstanding the short‑term correction, we believe it is premature to call an end to the long‑term equity bull market that began in 2021, as: (i) the global economy today is more resilient to oil shocks than in the 1970s; (ii) the correction to date has been driven more by declining price‑to‑earnings (P/E) multiples rather than deteriorating earnings growth expectations; and (iii) while the market’s shift in expectations from rate cuts to rate hikes is directionally correct, it may have been overdone.

While we moved our position in Asia ex‑Japan equities to neutral on 12 March 2026, we have maintained our preference for Hong Kong, China, and Singapore, all of which have outperformed the broader equity market. Within Hong Kong and China, we continue to advocate a barbell strategy — favouring quality yield and low‑beta stocks as near‑term defensive plays, while selectively positioning for medium‑ to long‑term structural themes, such as artificial intelligence (AI) proxies and policy beneficiaries in areas including technology innovation and domestic consumption. State‑owned enterprises (SOEs) with resilient cash flows are also preferred.

US – Facing the fog of war

Tensions in the Middle East show no signs of abating, prompting investors to reduce exposure to risk assets amid heightened uncertainty. Stagflationary pressures are beginning to emerge, with March sentiment surveys pointing to weaker business output expectations and softer consumer confidence, alongside rising near‑term inflation expectations. A key market concern is that the Federal Reserve may remain squarely focused on the inflation fight and pivot in a more hawkish direction as elevated oil prices persist, potentially weighing further on risk assets.

While these concerns are valid, we believe the longer‑term equity bull market remains intact. First, although a recession triggered by an oil shock cannot be ruled out, the bar for such an outcome is significantly higher today, as the oil intensity of US GDP has declined meaningfully. Second, the equity market correction thus far has been driven largely by multiple compression, with price‑to‑earnings (P/E) ratios adjusting to more reasonable levels — historically a more constructive setup for forward returns. Third, historical experience since the 1970s suggests that the S&P 500 Index has typically recovered from severe oil shocks over a 12‑month horizon. Fourth, the US electoral cycle is gaining momentum well ahead of the mid‑term elections, with cost‑of‑living and affordability issues moving centre stage — factors that should incentivise the administration to seek de‑escalatory off‑ramps as soon as possible.

Europe – Under the energy shockwave

European equities have corrected amid developments in the Middle East and the associated spike in energy prices. Europe is particularly sensitive to higher energy costs — natural gas in particular and segments of the European equity market that tend to be most negatively correlated with gas price increases, including the German DAX, Consumer Discretionary, cyclicals, and small‑ and mid‑cap stocks. In contrast, sectors at the other end of the spectrum include Energy, Renewables, the FTSE 100, and defensive sectors.

With respect to the implications of Iran‑related disruptions on European corporate earnings, the impact varies materially depending on whether one looks at headline earnings or earnings excluding the energy sector. For example, in 2022, MSCI Europe earnings per share (EPS) rose over the course of the year, with growth of 30% driven largely by the energy sector and supported by a stronger US dollar. Excluding energy, however, MSCI Europe forward EPS declined by 8% from peak to trough during the 2022 energy price spike. For 2026, market consensus currently expects 16% EPS growth, compared with our more conservative expectation of 10%.

Beyond the Middle East situation, fiscal expansion and infrastructure spending in Europe are set to continue, which should be supportive of sectors exposed to defence, domestic demand, construction, and capital goods.

Japan – Geopolitical concerns weigh on market

Japanese equities have declined by 8.7% since the outbreak of the Middle East conflict, underperforming global equities (MSCI ACWI Index). Sector performance has reflected a broader risk‑off bias, with energy, communication services, and utilities emerging as relative outperformers.

Japan is particularly exposed to the risk of a prolonged oil shock, given that crude oil imports transiting the Strait of Hormuz account for approximately 28% of the country’s energy mix. Looking to the most recent precedent in 2022, when oil prices nearly doubled, the MSCI Japan Index experienced a peak‑to‑trough drawdown of around 18%, highlighting the market’s sensitivity to energy price spikes.

In the near term, sectors such as energy, defence, mining, and marine transport are likely to remain preferred against the backdrop of elevated geopolitical risk. At the same time, the structural investment themes we have previously identified remain firmly intact, including:

1. artificial intelligence (AI), technology hardware, defence, energy, and critical resources; and
2. construction and real estate.

That said, persistently higher energy prices could lift headline inflation, potentially eroding real household incomes and weighing on private consumption, which remains a key downside risk to the domestic outlook.

Asia ex-Japan – Recalibrating our preferences

While we have moved Asia ex‑Japan equities to a Neutral weighting, we continue to see selective opportunities within the region, with a preference for China, Hong Kong, and Singapore equities. In contrast, we have downgraded Indonesia and the Philippines from Neutral to Underweight, while Malaysia has been lowered by one notch to Neutral.

The key downside risk for Asian equities remains a potential closure of the Strait of Hormuz, which could lead to higher energy and shipping costs, as well as disruptions to global supply chains. Beyond oil and liquefied natural gas (LNG), markets are also increasingly focused on the implications for fertilisers, propane, chemicals, and industrial gases.

China appears better positioned than many Asian peers to withstand a prolonged disruption, supported by one of the world’s largest strategic and commercial crude reserves, a relatively smaller reliance on oil and gas in its electricity generation mix, and ongoing progress in the transition towards electric vehicles and renewable energy.

While Singapore runs an oil and gas trade deficit, this remains modest as a share of GDP compared with many regional peers, and the country benefits from a relatively flexible fiscal position. In addition, financials, real estate, and multi‑industrial companies dominate key equity indices, and their higher dividend yields contribute to the perception of the market as being more defensive in nature. The continued rollout of the Equity Market Development Programme (EQDP) should further enhance market liquidity and help unlock value across Singapore‑listed equities.

China/HK – Weathering market volatility

While onshore A‑share equities have pulled back by around 5% (in US Dollar terms) since the outbreak of the Middle East conflict, they have nonetheless outperformed Hong Kong–listed Chinese equities, offshore China equities, and the broader Asia ex‑Japan universe. Banks, energy and utilities have emerged as relative outperformers across both onshore and offshore markets. China should also be better insulated from a prolonged oil shock, supported by its lower reliance on oil imports via the Strait of Hormuz, sizeable domestic coal reserves, and a growing share of renewables in its energy mix.

We tactically shifted our relative preference to the onshore A‑share market in early March, reflecting several structural advantages: (i) it exhibits the lowest correlation with US equities among major Asian markets; (ii) it provides broader exposure to policy‑supported sectors and industries; and (iii) it has displayed a more favourable earnings revision trend to date relative to offshore Chinese equities.

Valuations have also normalised close to historical averages, with forward price‑to‑earnings ratios of 10.8x for MSCI China and 12.7x for the CSI 300 Index, respectively.

In the near term, we continue to favour low‑beta stocks and quality yield plays as market volatility remains elevated. Sectors such as energy, petrochemicals, materials, and renewables are also well positioned to benefit from a prolonged period of energy market disruption.

Looking to the medium‑ to long‑term, structural themes remain intact, including: (i) artificial intelligence (AI) proxies; and (ii) policy beneficiaries linked to technology innovation, domestic consumption, and anti‑involution initiatives, all of which continue to offer upside optionality. In addition, state‑owned enterprises (SOEs) with resilient cash flows remain preferred, particularly as policymakers emphasise higher payout ratios and increased share buybacks, as highlighted at the National People’s Congress.

Global Sectors – Geopolitics at the steering wheel

Developments in the Middle East drove heightened sector rotation in March. Energy was the only sector to record positive price performance, while Utilities and information technology proved more resilient and corrected less than the broader market. In contrast, consumer discretionary continued to lag, reflecting sensitivity to both weaker demand conditions and rising input costs.

Candidates for portfolio hedging

Equity market performance following energy shocks has historically been uneven, though outcomes can be improved through sector allocation and quality tilts. Across past episodes examined, Energy stocks — particularly upstream producers — have unsurprisingly outperformed. Materials have also delivered relatively strong performance, especially within Emerging Market (EM) equities.

By contrast, sectors with higher exposure to consumer demand or input‑cost pressures, such as financials and consumer discretionary, have tended to lag in the US, while industrials and consumer discretionary have underperformed in EM. These segments include industries such as retail, transport, and automobiles, which are more vulnerable to cost inflation and slowing growth. In a risk‑off environment, investors also tend to rotate towards more defensive sectors.

When energy shocks prove persistent and prices remain elevated, the importance of quality becomes increasingly pronounced. Higher energy costs feed through into broader inflationary pressures and slower economic growth, creating a more challenging operating environment. In this context, companies with strong balance sheets, resilient cash flows, pricing power, and disciplined capital allocation tend to be better positioned to withstand margin pressure and earnings volatility, making them particularly attractive as portfolio stabilisers during periods of heightened uncertainty.

Companies with strong balance sheets, pricing power, and the ability to self‑fund their operations are better positioned to absorb these pressures. Key attributes—including sustainable competitive advantages, the ability to pass on inflationary costs, robust financial health (allowing firms to self‑finance when external funding becomes more expensive or even to pursue acquisitions), resilient earnings, and strong free cash flow generation, help mitigate volatility and support performance during periods of market stress.

Importantly, such quality characteristics are not confined to traditional defensive sectors. Instead, they can be identified across the equity universe through a disciplined focus on underlying fundamentals.

Heightened risks to technology supply chains from energy, sulphur and helium disruptions

Rising geopolitical tensions in the Middle East have increased the risk of supply‑chain disruptions affecting the global technology sector, particularly semiconductor production. Taiwan and South Korea — key global hubs for advanced AI logic chips and memory semiconductors, respectively — appear especially exposed.

In the event of disruption, Taiwan would likely need to rapidly replace potential LNG supply shortfalls with imports from Australia or the United States, while South Korea is seeking to mitigate risks by increasing coal and nuclear power generation. Although higher energy costs would present a headwind, semiconductor producers are likely able to pass through cost increases, given the structurally tight supply conditions in AI chips and memory markets.

Beyond energy, semiconductor manufacturing also relies heavily on sulphuric acid for wafer cleaning and helium for cooling during the fabrication process — both of which are significantly produced in the Gulf region. Any sustained disruption to these inputs could pose additional operational challenges. Moreover, insufficient availability of sulphuric acid could adversely affect the processing of copper and cobalt ores, with potential knock‑on effects for the build‑out of data centres and broader technology infrastructure.