Navigating Geopolitical Storms: Asian Equities and Commodities in the Iran-U.S. Crossfire

The U.S. military strikes on Iran's nuclear facilities in June 2025 have reignited geopolitical tensions in the Middle East, sending shockwaves through global energy markets and Asian equities. With oil prices soaring and the Strait of Hormuz—a chokepoint for 20% of global oil trade—under threat of closure, investors face a landscape of both peril and opportunity. This article examines sector-specific risks and opportunities in Asian equities and commodities, focusing on defense contractors' ascent in Japan and South Korea, oil price sensitivity across regional markets, and the strategic implications of a potential Strait disruption.

Defense Contractors: Riding the Geopolitical Wave

The Iran-U.S. conflict has accelerated defense spending in Asia, with Japan and South Korea's defense contractors at the forefront of this trend.

Japan's Defense Renaissance:
Japanese firms like Mitsubishi Heavy Industries (MHI), IHI, and Kawasaki Heavy Industries (KHI) have seen robust gains as Tokyo accelerates its defense modernization. The government's pledge to raise defense spending to 2% of GDP by 2027, alongside its first-ever participation in the multinational Global Combat Air Programme (a sixth-generation fighter jet project with the U.K. and Italy), has fueled optimism.

However, challenges persist. While MHI's shares rose 18% in 2024, executives caution that production bottlenecks and the complexity of multinational projects could delay near-term profits. Investors should focus on companies with diversified portfolios, such as MHI (which also manufactures trains and energy systems), to mitigate risks.

South Korea's Dominance:
South Korean firms like Hanwha Aerospace, Hyundai Rotem, and LIG Nex1 have surged, benefiting from global demand for military hardware. Hanwha's shares climbed 16.67% in early 2025, driven by export contracts for missiles and aircraft components. South Korea's arms exports, which grew from $2B in 2019 to $7.3B in 2021, now target European allies seeking to boost defense spending post-Ukraine war.

Tactical Take: Overweight Asian defense contractors with exposure to export markets and diversified revenue streams.

Oil Price Volatility: Winners and Losers in Asia

The specter of a Strait of Hormuz closure has pushed Brent crude to $81/barrel, with analysts warning of $130/barrel if supply disruptions materialize. This volatility creates stark divergences in Asian equities.

Winners:
- Energy Majors and Refiners: Companies like Reliance Industries (India) and Sembcorp Marine (Singapore) benefit from higher crude prices due to their exposure to refining margins and LNG infrastructure.
- Defensive Sectors: Utilities and infrastructure firms with inflation-hedging capabilities, such as Japan's Tokyo Electric Power, may outperform as rate cuts become less likely.

Losers:
- Strait-Dependent Economies: Japan, South Korea, and India, which rely on the Strait for 80–90% of their oil imports, face inflation spikes and supply chain bottlenecks. Their equities—particularly in transportation, chemicals, and manufacturing—are vulnerable.
- High-Leverage Firms: Companies in energy-intensive sectors (e.g., steel, cement) in China and Southeast Asia may struggle with rising input costs.

Tactical Take: Rotate into energy equities and defensive sectors while hedging against Strait-dependent economies.

Strait of Hormuz: The $1.2 Trillion Chokepoint

A full closure of the Strait—a move Iran has threatened—would disrupt 20 million barrels/day of crude, spiking oil prices and triggering global recession risks. The U.S. and IEA's emergency reserves (1.2 billion barrels) offer limited relief.

Immediate Risks:
- Inflation and Rate Hikes: Higher oil prices could push U.S. inflation to 6%, forcing the Fed to delay rate cuts. Asian central banks would face similar pressures, dampening equity valuations.
- Supply Chain Chaos: Japan's auto sector and South Korea's semiconductors, both reliant on Middle Eastern oil, would face production curbs.

Strategic Play:
- Long Oil Futures: Investors can use ETFs like USO or OIL to capitalize on price spikes.
- Short Strait-Dependent Indices: Consider shorting ETFs tracking Japan (EWJ), South Korea (EWY), or India (INDA) to hedge against disruption.

Final Recommendations

1. Overweight Defense Contractors: Focus on MHI (Japan) and Hanwha Aerospace (South Korea) for long-term growth.
2. Underweight Strait-Dependent Equities: Avoid cyclicals in Japan, South Korea, and India; favor energy majors and utilities.
3. Hedge with Commodities: Use oil ETFs and short Strait-exposed markets to offset downside risks.

The Iran-U.S. conflict underscores the fragility of global supply chains and the premium on geopolitical resilience. Investors must balance opportunistic bets in defense and energy with caution toward economies teetering on the edge of the Strait's storm.