Asian stocks erase 2026 gains as Iran war stokes inflation fears

Asian equities tumbled on Tuesday, erasing their gains for 2026 as the prolonged conflict in West Asia drove a surge in energy prices, stoking fears of sticky inflation and a slowdown in global growth.

The regional benchmark, the MSCI Asia Pacific Index, dropped as much as 1.1 per cent during trading, with heavyweight chipmakers Samsung Electronics and SK Hynix among the biggest drags. The broader MSCI Emerging Markets Index also slipped, wiping out its year-to-date advance.

The reversal marks a sharp shift in sentiment for Asian markets, which had begun 2026 on a strong footing, buoyed by optimism around artificial intelligence-led demand and a rally in technology stocks. That momentum has now faltered as investors reassess risks stemming from the ongoing Iran war, now in its fifth week.

From boom to bust

The MSCI Asia Pacific Index had surged roughly 15 per cent from the start of the year to a record high on February 27, outperforming global peers. However, those gains have now evaporated as rising crude oil prices and supply disruptions cloud the economic outlook.

Investors are increasingly pricing in the possibility that central banks may need to keep interest rates higher for longer to contain inflation, particularly as energy costs ripple through supply chains.

The war has also dented appetite for riskier assets, prompting a pullback from sectors that had previously driven the rally, especially technology and semiconductor stocks.

Energy shock hits Asia hardest

Asian economies remain particularly vulnerable to oil price shocks due to their dependence on energy imports from West Asia. Countries such as Japan, South Korea and India import the bulk of their crude requirements, making them sensitive to disruptions in the region.

The surge in energy costs is expected to squeeze corporate margins while also pushing up consumer prices, complicating the policy outlook for central banks across the region.

Market participants warn that if crude prices remain elevated, it could trigger a dual blow of weaker earnings growth and tighter financial conditions, further weighing on equities.

With inputs from agencies.