AI Chips or Hormuz Ships?

March was a turbulent month for Asian markets. US‑Israeli strikes on Iran, and Iran’s subsequent targeting of Gulf oil infrastructure culminated in the effective closure of the Strait of Hormuz. This triggered a sharp spike in oil prices and a sudden, broad-based sell-off across the region.

Asia felt the impact particularly acutely because many economies in the region are large net energy importers and rely heavily on supplies that pass through the Strait of Hormuz. Concerns around higher inflation, weaker growth and rising risk premiums quickly fed through into Asian equity markets.

But energy is only half the story – Asian markets are also defined by technology and the artificial intelligence (AI) investment boom, which is why a key question facing investors right now is: AI chips or Hormuz ships?

Hormuz Ships: How we see the economic risks

When assessing the potential impact on Asia, the key factors are energy import dependence, diversification of supply, strategic reserves and fiscal strength. On that basis, we see a clear split between relative winners, markets facing manageable risks, and those that appear most vulnerable.

Relative winners

China, Hong Kong, Singapore and Australia

China looks relatively well positioned. It has a more diversified energy base, substantial oil and gas reserves, and less reliance on Gulf supplies than many other Asian economies. Geopolitically, it could also benefit if capital flows shift away from more exposed regions.

Australia stands out as a net energy exporter and should therefore be better placed if oil prices remain elevated.

Singapore appears more resilient than sometimes assumed. While it has no domestic energy production, most of its gas comes from Indonesia and Malaysia, and the majority of its Liquified Natural Gas (LNG) imports are sourced from Australia. Singapore also has strong public finances and has put reciprocal energy security arrangements in place with Australia, reducing near‑term risks. As a perceived safe haven with a high weighting to defensive, higher‑yielding stocks, it has already shown relative resilience.

Hong Kong benefits from indirect rather than direct exposure to Gulf energy imports and has historically benefited from capital flows towards China during periods of geopolitical stress in the West.

Manageable risks

South Korea, Taiwan, Malaysia and Vietnam

South Korea and Taiwan are among the most exposed to Middle Eastern oil and LNG imports on a percentage basis. However, both countries have large strategic reserves, relatively low government debt and the ability to secure supply, even at higher prices, and to support consumers if needed. Energy also represents a relatively low share of GDP, making the overall economic impact more manageable.

Malaysia benefits from domestic energy production, while Vietnam’s position is more nuanced. Although reserve cover is low, energy supply is more diversified than in some peers. That said, extended disruption would still present challenges.

Most vulnerable

Philippines, Indonesia, Thailand and India

We believe the greatest risks lie with lower‑income economies where higher energy costs feed quickly and directly into household budgets and public finances.

India stands out given its heavy reliance on Gulf oil and gas, widespread use of gas for cooking, and the importance of gas as an input to fertilisers. These pressures are compounded by India’s export exposure to the Middle East and the importance of remittances from the region (money sent home by the large number of Indian workers employed in Gulf states).

The Philippines and Indonesia are vulnerable to rising energy prices squeezing household incomes, worsening already stretched fiscal positions and potentially increasing the risk of social unrest. Vietnam is also exposed due to very low reserve cover and its reliance on exports.

How Schroder Asian Total Return (ATR) is positioned

ATR’s existing positioning reflects a degree of natural resilience to these risks. The trust has limited exposure to emerging ASEAN markets, with just one holding in the region, and around 5% exposure to India. While we had previously been considering adding to India on weakness, we are currently cautious given the potential impact of sustained higher energy prices on consumers and earnings.

The portfolio has greater exposure to markets we see as relatively resilient, including Australia, Singapore and Hong Kong, and has selectively added to positions in these areas where valuations have become more attractive.

While disruption to energy markets matters most for economies, Asian equity markets remain heavily influenced by technology and investment linked to AI – hence the question of AI chips or Hormuz ships. ATR continues to take a balanced approach: trimming select technology holdings where valuations appear stretched, while maintaining exposure to long‑term structural growth themes and using selective hedging to help manage downside risks. While AI capital expenditure is still growing, we continue to monitor whether the cycle is approaching a peak – and position accordingly.

We believe markets are underestimating how long these geopolitical risks may persist. ATR’s existing bias towards more defensive, higher-yielding positions in Australia, Singapore and Hong Kong – alongside selective hedging and reduced exposure to the region’s most vulnerable economies – reflects that view, while preserving meaningful exposure to Asia’s long-term growth story.

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_{Risk considerations – Schroder Asian Total Return Investment Company}

• _{China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China “A” shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund’s investments and could cause the fund to defer or suspend redemptions of its shares.}
• _{Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.}
• _{Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.}
• _{Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.}
• _{Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.}
• _{Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.}
• _{Gearing risk​: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.}
• _{Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.}
• _{Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.}
• _{Operational risk​: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.}
• _{Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.}
• _{Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.}
• _{Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.}