Key Points
- The likelihood of looming stagflation ‘has barely moved,” according to HSBC strategists – but equity markets appear to be pricing in a recession
- They named countries and sectors where there could be buying opportunities for investors.
- Emerging markets and cyclical stocks were highlighted in the Tuesday note.
Equity markets appear to be pricing in a recession as the U.S.-Iran war drags on — but heavy selling pressure has opened up some buying opportunities for investors, according to HSBC strategists. In a note published by the banking giant on Tuesday, Alastair Pinder and Pankaj Agarwala said volatility in the oil market had caused “dislocations in equity markets.” Since the U.S. and Israel launched strikes on Iran at the end of February, surging oil prices have sparked fears of a 1970s-style stagflation. But HSBC’s team said they believe recent equity rotations tell a different story. “Talk of a shift toward stagflation is building, but we would argue equity markets price action is more indicative of trading for a recessionary outcome,” they said. “Our regime models show the equity market is now pricing a 35% probability of recession, up from 10% just two weeks ago, while the implied likelihood of stagflation has barely moved, holding at 8%.” Emerging markets, industrials and banks Pinder and Agarwala outlined where they see opportunities for investors in the current environment. They said global equities had fallen by around 5% since the start of the Iran war — but noted their machine learning systems suggested the overall move was largely justified. “Still, underneath the surface there appears to be a number of dislocations,” they said. “We believe Korea, South Africa and Indonesia have been oversold by about 5-10%, leaving valuations that look increasingly attractive, especially as our work shows these markets are not among the most exposed to higher oil prices.” South Korea’s Kospi index was the world’s top-performing stock market in 2025, but has seen historic volatility since the war broke out, thanks to its concentration of memory giants and its sensitivity to energy prices. Equities listed in the UAE — which has repeatedly been struck by Iranian drones and missiles since the war began — have also been volatile since the country reopened its financial markets from a brief closure at the outbreak of the Iran conflict. But Pinder and Agarwala said the sell-off of stocks in Dubai and Abu Dhabi “screens as roughly 10% below what fundamentals would imply over the past two weeks.” They added, however, that the gap “likely mirrors the scale of the geopolitical risk premium now embedded.” Countries with equity indexes that have undershot the macroeconomic fallout of the war included Norway, Saudi Arabia, Malaysia and Singapore, HSBC’s data shows. When it came to specific sectors, HSBC’s strategists noted that there had been a “sharp 9% underperformance of cyclicals versus defensives since mid-February.” “We would lean toward cyclical sectors that can still hold up in a stagflation backdrop,” they said. “Across sectors we believe materials, industrials and financials look well positioned.” Retail, travel and leisure, and media stocks were named the top “stagflation losers.”