From risk-off to selective positioning

RISING tensions in the Middle East are rippling through global financial markets, but a tentative improvement in investor sentiment is beginning to take shape.

Recent market behaviour suggests that investors are cautiously reassessing worst-case scenarios, even as energy prices remain volatile and geopolitical risks linger.

This shift in tone is also reflected in observations by RHB Research, which notes early signs of stabilising sentiment amid the uncertainty.

“We have observed an improvement in risk appetite.

“Our RHB Risk Sentiment Index has signalled an early reprieve from risk-off sentiments, and now suggests a move back to risk-on,” says the research house, pointing to a shift that is influencing asset allocation decisions across Asean markets.

At the same time, it maintains a guarded stance.

“Our near-term asset allocation strategy remains cautious and defensive, albeit we are observing an early possible dissipation of geopolitical noise,” it explains, underscoring that while sentiment is improving, uncertainty has not fully dissipated.

The evolving situation in the Middle East is shaping investment flows, commodity prices, and growth expectations across Malaysia, Singapore, Indonesia and Thailand, with differing levels of exposure creating a varied regional impact.

From an investment perspective, the current environment is driving a tilt towards traditional hedges and commodities.

“We advocate an ‘overweight’ position in crude oil, reflecting upside risks from supply disruptions, and an ‘overweight’ in gold as a hedge against geopolitical uncertainty and medium-term inflation risks,” the research house notes.

“The US dollar should find modest support if tensions persist. However, recent price action suggests that safe-haven demand has softened as markets price in a lower probability of worst-case outcomes,” it adds.

Equities, however, remain under pressure.

“Equities remain ‘underweight’, given the potential drag from higher energy costs on growth and corporate margins,” it says, while noting that investment-grade bonds are held at “neutral” for diversification and to retain exposure to growth-sensitive assets once geopolitical noise subsides.

Fallout may be temporary

Beyond the immediate turbulence, the broader global outlook remains intact.

“Our base-case assumption is that the current Middle East conflict may be contained for over four to six weeks,” RHB Research states, suggesting that any economic fallout may be temporary if the situation does not escalate further.

“Should this timeline hold, the negative impact on growth and sentiment is likely to be short-lived, with investor confidence recovering as uncertainty fades.”

Under this scenario, global growth is expected to stabilise.

“Global growth should revert to our 3.5% to 3.7% expectations in 2026, supported by a relatively solid external environment that has been in place since the second half of financial year 2025 (2H25),” it says, while cautioning that investors must remain alert to structural risks beyond geopolitics,” it adds.

“Investors should therefore look past the immediate geopolitical tensions and remain focused on broader structural risks.”

It highlights concerns such as trade protectionism, artificial intelligence valuations and persistent inflation pressures.

Malaysia most resilient

Across Asean, the economic impact of the Middle East tensions varies significantly, depending largely on each country’s energy profile and external dependence.

Malaysia is viewed as relatively resilient.

“We view Malaysia as the least negatively impacted Asean economy across the region,” RHB Research says, citing the country’s dual role as both an oil importer and producer.

The current tensions may still filter through the economy.

“The current tensions in the Middle East may affect Malaysia’s economy through higher oil prices and potential supply disruptions if the situation is prolonged,” it notes.

However, Malaysia’s domestic capabilities provide a buffer.

“While Malaysia relies on the Middle East for around 69% of its crude oil imports, it is also an oil producer with refining capabilities, placing it in a relatively robust position compared to other oil-importing economies,” it points out.

Policy measures are also expected to cushion the impact.

“Our key conviction is that the recent rise in Brent crude prices has a moderate but manageable effect on the economy,” it says, maintaining growth and inflation projections.

It adds: “Importantly, policy measures, such as price controls and fuel subsidies, will continue to help cushion the pass-through of global price shocks to domestic prices.”

Overall, the impact remains contained.

“Oil price movements have a moderate and manageable impact on Malaysia’s economy and fiscal position,” it states, noting both the benefits of higher energy revenues and the pressures from increased domestic costs.

Asean vulnerabilities

In contrast, Singapore faces greater vulnerability due to its reliance on imports and global trade.

“We are most cautious on Singapore,” RHB Research says, warning that escalation could have broad consequences.

“As a small, open economy heavily reliant on trade, Singapore might be negatively affected by ongoing geopolitical conflicts in the Middle East, particularly in trade,” it explains.

The country’s dependence on imported energy is a key concern.

As a country with no domestic energy resources, Singapore relies almost entirely on imported fuels, with energy products accounting for roughly 20% of its total imports.

The transmission channels are multiple.

“We view Singapore’s growth and trade outlook to weaken if Middle East tensions escalate in 1H26, through three key channels,” it says, pointing to rising input costs, inflationary pressures, and weaker external demand.

If prolonged, these effects could intensify, posing downside risks to its full-year gross domestic product growth of 3%.

Indonesia, meanwhile, appears relatively insulated.

“The overall macroeconomic impact on Indonesia is likely to remain manageable and relatively limited,” RHB Research notes, highlighting its diversified energy sourcing.

“The shock is expected to be transmitted mainly through policy and sentiment channels rather than through severe supply chain disruptions,” it explains, distinguishing Indonesia from more externally exposed economies.

The country’s domestic demand-driven structure also helps.

“Given that Indonesia’s economy is predominantly driven by domestic consumption, the effect of higher oil prices tends to operate through fiscal and inflation channels,” it highlights.

Even so, there are trade-offs.

The broader impact on aggregate demand is relatively contained, it says, although higher subsidies may strain fiscal resources and weigh indirectly on growth.

Thailand stands out as the most exposed among the four.

“Thailand is expected to face a relatively more material impact, reflecting its greater external dependence and energy intensity,” RHB Research states.

“Thailand’s vulnerability is fundamentally anchored in its high energy import dependence and concentration of supply from the Middle East.”

It also notes that energy shocks could ripple through key industries.

“Thailand’s key industries, including automotive, electronics, and petrochemicals, are highly sensitive to fluctuations in fuel and feedstock costs, warning of margin compression and potential production disruptions.

Tourism adds another layer of risk.

“Thailand also faces significant tourism-related risks, as the sector remains a critical pillar of the economy,” RHB Research says.

Higher travel costs could dampen visitor arrivals, creating knock-on effects for services and consumption.

Across the region, the duration of the Middle East conflict remains the key variable shaping market direction and investment strategy.

As RHB Research puts it, “the Middle East conflict remains a significant near-term shock, but its lasting impact will depend primarily on duration”.

For investors, this calls for a cautious and defensive allocation approach, while remaining prepared to adjust positioning as geopolitical risks evolve and market conditions stabilise.