(The views expressed here are those of the author,

the founder and CEO of Emmer Capital Partners Ltd)

By Manishi Raychaudhuri

HONG KONG, March 20 (Reuters) - Before the Iran war

broke out, Asian equities were rallying on the back of an

earnings boom driven by artificial intelligence enthusiasm and

commodity exports - not domestic consumption. The Middle East

conflict is now stress-testing just how exposed that model is.

Asia's markets took the sharpest hit from the Iran war-related

energy shock, underscoring the region's reliance on Middle

Eastern energy. South Korea was emblematic: the KOSPI index

suffered its worst-ever daily percentage loss on March

4, plunging more than 12%.

Leading up to the Middle East crisis, Asian stocks were

enjoying a healthy rally driven not by investors' willingness to

pay ever-higher price-to-earnings (PE) multiples - as was the

case in 2024 and much of 2025 - but by an improving earnings

outlook.

Since late October, upgrades to earnings estimates have

boosted Asian stock prices even as forward PE multiples have

fallen.

The 12-month forward PE for Asian stocks peaked at 16.8x on

October 9, according to FactSet consensus estimates. Since then,

the index has risen 6.4% while the forward PE has declined 11%,

indicating a 17% upgrade to 12-month forward earnings per share

(EPS) in about five and a half months.

South Korea's earnings upswing was the starkest. From

October 27 through February 27 - the day before the joint

U.S.-Israeli strike on Iran - the market had appreciated roughly

55%, while its forward PE had declined by 16%. Taiwan came in a

distant second, with 19% market appreciation and a 2% PE decline

over that period. Both markets have since seen pullbacks of 8%

and 4%, respectively.

Still, the sharp divergence between market performance and

forward PE in Asian markets over the past six months is notable

- and quite rare. Since the 2008 global financial crisis, it has

happened only twice: from July 2009 to July 2010 and from

September 2016 to January 2018. In both episodes, earnings

upgrades were driven by large liquidity injections that fuelled

consumption and investment booms.

The cause of the discrepancy this time around is clear: the

AI boom. Asian stocks with the biggest earnings upgrades all

have an outsized role in the AI infrastructure supply chain.

TECH DOMINANCE

Korean and Taiwanese stocks are in the lead here. Consensus

EPS estimates for Korean equities surged over 76% in the past

six months, while those for Taiwan's stocks jumped 19%.

That's unsurprising as technology represents 42% of the

Korean market and over 70% of the Taiwanese index, according to

FactSet.

Taiwan Semiconductor Manufacturing ( TSM ) and Korean tech

giants like Samsung Electronics ( SSNLF ) and SK Hynix

have seen their earnings turbocharged by

skyrocketing prices for memory chips given the current imbalance

between global supply and the insatiable AI demand.

The AI data centre boom - as well as rising investment in

defence and infrastructure globally - has also pushed up

earnings estimates significantly in the materials sectors in

China, the Philippines, Malaysia and Indonesia. This reflects

surging copper, aluminium, zinc and precious metal prices.

Korean aerospace and defence companies have also seen

earnings outlooks rise as geopolitical risk has skyrocketed.

In short, Asia's current earnings upgrade boom is being

driven almost entirely by global megatrends - not domestic

fundamentals.

CAN THIS LAST?

Against this backdrop, an obvious question needs to be

asked: how sustainable are Asian earnings upgrades?

First, there's the AI story. Semiconductors and memory chips are

inherently cyclical businesses. Today's shortage may persist

well into 2027, but new capacities could eventually come online.

Moreover, the durability of the high-tech capex binge has

been questioned for months, given the questionable profitability

of the investments and the logistical hurdles hyperscalers could

face.

Now, add to this spiking energy prices and potential

shortages of raw materials caused by the Iran war. This all

calls into question the longevity of the outsized earnings at

Asia's AI "pick-and-shovel" providers.

Of course, the conflict could boost shares of global defence

companies and push materials prices even higher - but if Asian

companies are struggling to access the energy they need to

function, they are unlikely to benefit.

DOMESTIC CONSUMER LAGS

If the global megatrends supporting Asian equities do cool,

domestic consumers will have to pick up the slack.

However, for now, domestic consumption is Asia's Achilles'

heel. Year-on-year retail sales growth is around 1% in China,

Korea and Taiwan. India and Vietnam, with roughly 8-10% retail

sales growth, are faring marginally better.

It's notable that domestic consumption-driven sectors, like

consumer discretionaries, consumer staples, retail, e-commerce,

healthcare, media and telecommunications, were mostly absent

from the list of Asia's top earnings estimate gainers.

Instead, these sectors dominated the list of the top 25

earnings "losers" - market sectors with the largest earnings

downgrades - with eight in India, a consumption-driven economy.

North Asia's consumption-focused sectors have not performed

as poorly, but many have still suffered considerable EPS

downgrades in the past six months, as intense domestic

competition in China has squeezed margins.

Asia's earnings boom thus hasn't been built on rock, but on

other people's demand. With the world now facing a global energy

shock, the foundation of the Asian equity story will be tested

mightily.

(The views expressed here are those of Manishi Raychaudhuri, the

founder and CEO of Emmer Capital Partners Ltd and the former

head of Asia-Pacific Equity Research at BNP Paribas

Securities.)

Enjoying this column? Check out Reuters Open Interest

(ROI), your essential new source for global financial

commentary. Follow ROI on LinkedIn, and X.

And listen to the Morning Bid daily podcast on Apple, Spotify,

or the Reuters app. Subscribe to hear Reuters journalists

discuss the biggest news in markets and finance seven days a

week.

(Writing by Manishi Raychaudhuri;

Editing by Marguerita Choy)