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The brokerage believes that oil prices could remain elevated in the coming months, a development that may disproportionately impact Asian economies due to their heavy reliance on imported energy.
Oil Prices Could Stay Elevated
According to the brokerage’s outlook, Brent crude is expected to average around $90 per barrel in the first half of 2026. However, the scenario could quickly turn more volatile if geopolitical tensions escalate further in the Middle East.A key risk highlighted in the report is a possible disruption in the critical global oil shipping route through the Strait of Hormuz. Any disruption there could push Brent prices sharply higher to the $120–$130 range, triggering significant stress across global markets.
Demand Destruction Risk at Higher Prices
Morgan Stanley cautions that if oil were to surge to such elevated levels, demand destruction may become inevitable. Historically, sharp spikes in energy prices have led to reduced consumption, slower economic activity, and pressure on corporate earnings.
Such conditions could weaken investor sentiment and trigger volatility in equity markets, particularly in regions sensitive to energy costs.
Asia Seen as More Vulnerable
The brokerage believes Asian markets may face greater downside risks compared to other regions. Many Asian economies are heavily dependent on imported oil, which makes them more exposed to rising crude prices, currency pressures, and widening current account deficits.
Higher energy costs can also fuel inflation, potentially limiting the ability of central banks in the region to maintain accommodative monetary policies.
Bear Case Signals Significant Downside
In its bearish scenario, Morgan Stanley estimates that Asian equity markets could decline by 15% to 20% if oil prices surge and geopolitical tensions intensify. Such a scenario would likely coincide with tighter financial conditions, weaker growth expectations, and declining investor risk appetite.
Investors Urged to Remain Cautious
Given the uncertain backdrop, the brokerage recommends that investors remain cautious and consider trimming exposure during rallies rather than aggressively adding to positions.
With energy markets, geopolitics, and global liquidity conditions all in flux, Morgan Stanley believes risk management and selective positioning will be critical for investors navigating Asian markets in the months ahead.