Global equity markets are digesting the impact of the Middle East conflict based on a recessionary logic, with HSBC strategists suggesting that sharp sell-offs have created buying opportunities in some emerging markets.

HSBC strategists Alastair Pinder and Pankaj Agarwala stated in a Tuesday research note that since the escalation of Middle East tensions in late February, market panic triggered by surging oil prices has increased the probability of recession pricing in global equities from 10% two weeks ago to 35%. Meanwhile, stagflation pricing probability remains at just 8%, showing almost no significant movement. This divergence indicates that the current market sell-off logic aligns more closely with recession trading rather than the widely-feared 1970s-style stagflation scenario.

The strategists noted that despite heavy selling pressure, some markets have developed oversold mismatches, presenting attractive entry opportunities for investors. They identified South Korean, South African, and Indonesian equities as approximately 5% to 10% oversold. UAE markets in Dubai and Abu Dhabi show valuations undervalued by about 10% relative to fundamentals, though this discount partly reflects geopolitical risk premiums.

Global equity markets have declined approximately 5% since late February. Persistent oil price volatility has heightened investor concerns about stagflation risks, with cyclical sectors underperforming defensive sectors by about 9%.

Recession Pricing Dominates Market, Stagflation Narrative Overstated HSBC strategists clearly distinguished between stagflation and recession scenarios in their research note. Despite increasing discussions about a "stagflation shift," Pinder and Agarwala believe actual market movements convey a different signal.

"Our mechanism model shows equity markets are currently pricing a 35% recession probability, significantly higher than the 10% from two weeks ago, while implied stagflation probability remains almost unchanged at 8%," they wrote in the report.

This data discrepancy suggests market participants don't genuinely believe stagflation will become the dominant scenario, with selling behavior reflecting greater concern about sharp economic growth deterioration.

Opportunities Emerge in South Korea, South Africa, Indonesia and Gulf Markets At the market-specific level, HSBC used machine learning systems to calibrate market declines against fundamentals, identifying several oversold opportunities.

South Korea, South Africa and Indonesia were judged to be approximately 5% to 10% oversold. HSBC noted these three markets have low exposure to oil price increases, making current valuations particularly attractive. South Korea's Kospi index was previously among the world's best-performing markets for 2025 but has experienced significant volatility following the conflict due to concentration in memory chip giants and sensitivity to energy prices.

In Gulf markets, UAE equities have remained under pressure since markets reopened after a brief closure. HSBC estimates Dubai and Abu Dhabi stock declines represent approximately 10% undervaluation relative to fundamentals. However, strategists cautioned this gap "likely reflects geopolitical risk premiums embedded in current stock prices" that investors should factor into their considerations.

In contrast, equity declines in Norway, Saudi Arabia, Malaysia and Singapore are below levels explainable by macroeconomic shocks, representing markets where fundamental downward revisions haven't been fully reflected.

Cyclical Sectors Preferred Over Defensive Regarding sector allocation, HSBC strategists recommend seeking defensive characteristics within cyclical sectors rather than making a full switch to defensive positioning.

"We prefer cyclical sectors that maintain resilience even in stagflation environments," Pinder and Agarwala stated. "Overall, we consider materials, industrials and financial sectors to be in relatively favorable positions."

Conversely, HSBC identified retail, travel and leisure, and media sectors as the "biggest losers" in stagflation scenarios, considering these sectors most vulnerable to dual pressures of demand contraction and rising costs.