Daily swings of 10 per cent are rare for a national stock index. Yet over the past week such volatility has become a recurring feature of Asian markets. Strikes on Iran were immediately followed by a 7 per cent drop in Korea’s benchmark Kospi index, then another 12 per cent the next day, while Japan’s Nikkei 225 also fell. A day later, the Kospi index rose 10 per cent, its strongest rally since the global financial crisis.
That early reaction reflects the fact that both Korea and Japan are among the world’s most energy import-dependent economies. Neither have meaningful local oil resources and both rely heavily on crude shipped from the Middle East. South Korea imports about 1bn barrels a year, meaning each $10 increase in global oil prices raises the country’s annual crude import bill by around $10bn. Crude prices surpassed the $100 mark on Monday, up from $72 before the strikes. It makes sense that when conflict erupts in the region, investors are quick to price in the possibility of higher energy costs.
But the direct impact of higher oil prices on listed companies is less straightforward. Across most local sectors, with the exception of airlines, shipping and petrochemicals, energy accounts for only a modest share of total operating costs. Industries such as electronics and machinery, which account for the largest chunk of Korean and Japanese markets, have lower direct oil exposure. Chipmakers and electronics group costs are tied closely to capital equipment and raw materials.