The steep rise in oil prices due to concern over cuts in supply from OPEC member Iran is the single-biggest risk to the performance of Asian markets, Kelvin Tay, Chief Investment Strategist, Singapore UBS Wealth Management told CNBC on Friday.
Asian markets have performed strongly since that start of the year.
The Shanghai Composite has gained around 10 percent year-to-date and the Japanese market has gained about 14 percent.
But rising oil prices could force a change in monetary policy, which in turn could hurt Asian markets, Tay said.
“There are risks involved with the Asian markets for sure…And I think the biggest risk here is basically oil prices.
If oil prices spike up sharply, dramatically, then you’re going to see inflation coming up strongly,” Tay said.
“If that’s the case, central banks in Asia will have to react to that. They will have to raise interest rates or slow down the pace of easing, and that in turn is going to be negative for all the Asian markets,” he added.
Oil prices have risen significantly in recent weeks, boosted by tensions between Iran and the West over Iran’s nuclear program.
Strong US Markets = Weak Asian Markets?
The North-Asian markets and China in particular are more leveraged towards the U.S. economy, so positive data coming out of the United States will be reflected in these markets, Tay said.
But that in turn means that if the U.S. economy is growing strongly, a lot of the Chinese numbers will be “way above expectations,” he said.
If that’s the case then the Chinese central bank is not likely to ease as much as the market is hoping for, Tay said.
As a result, credit constraints “will remain for quite some time, and that’s negative for the markets”.
“For Japan, a lot of it has to do with the Japanese bank introducing an inflation target of 1 percent, which means it will inject a lot of liquidity into the market,” Tay said of the Japanese market’s performance.
Steven Saywell at BNP Paribas pointed out that exchange rate levels are also helping Japan, and warned that a strengthening of the yen was another risk to growth.
Japan and Japanese exporters were also clearly benefiting from a weaker yen, he said.
“We’re more cautious on whether that yen weakness is likely persist in the markets….that is a big risk out there.” BNP Paribas has forecast 8.5 percent growth for China in 2012.