The selloff follows a sharp rise in global oil prices toward $100 a barrel, intensifying pressure on Thailand, which relies on the Middle East for nearly half of its oil and gas imports, according to Krungsri Research.

Data showed foreign investors were net sellers of $823 million in Thai equities in March, while bond outflows reached $705 million, marking the largest combined outflow since October 2024. The reversal came after a brief resurgence in inflows earlier this year, including $1.7 billion in equity purchases in February.

Investor optimism had been buoyed by the election of Prime Minister Anutin Charnvirakul, whose victory raised expectations of political stability and economic reform.

However, the outbreak of the Iran conflict at the end of February triggered a rapid reassessment of risk.Analysts say Thailand faces a more acute challenge than many regional peers due to its economic structure and policy constraints.

The economy had already been struggling, with growth of 2.4% last year and a prolonged period of deflation that prompted a rate cut by the central bank in February.“The risk remains that higher fuel costs hit consumption and disrupt exports and tourism,” said Daniel Tan, a portfolio manager at Grasshopper Asset Management, highlighting concerns about key growth drivers.

Thailand’s heavy reliance on natural gas, which accounts for more than half of its power generation, adds to its exposure. Rising liquefied natural gas imports are expected to further increase costs as energy markets tighten.

The Thai baht has weakened nearly 3% since the conflict began, though it has recovered some ground following a recent ceasefire. Analysts say the currency is acting as a key adjustment mechanism, helping absorb external shocks.

Market participants also point to limited policy flexibility. With public debt nearing the government’s self-imposed ceiling of 70% of gross domestic product, fiscal space is constrained, while monetary policy faces a trade-off between supporting growth and containing inflation.

“There’s a broad consensus among investors that Thailand is in a policy bind,” said Gary Tan of Allspring Global Investments, noting that the central bank has limited room to tighten or ease policy without adverse consequences.

Inflation, which had been contracting earlier this year, is now projected to rise as much as 3.5% depending on how the conflict evolves, marking a sharp shift in the economic outlook.

While a temporary ceasefire has supported a rebound in Thai equities and the baht, analysts caution that prolonged high energy prices could further weigh on growth, consumption and the external balance.

The shift marks a departure from earlier market resilience, with traders now pricing in longer-term disruptions to energy supply chains and global trade flows. Analysts said the reassessment reflects growing concern that the conflict could inflict sustained economic damage rather than remain a short-lived shock.

Global equities extended losses, with the S&P 500 falling 1.5% on Friday as major technology firms led declines, while futures dropped a further 0.6% in Asian trading. Japan’s Nikkei 225 slid 3.5%, and China’s CSI 300 Index was on track for its steepest losses since tariff-driven market turmoil last year.

MSCI’s global equities gauge, the MSCI World Index, hit a four-month low on Monday after breaking below its 200-day moving average, a key technical level closely watched by investors.

Market participants said the selloff reflected waning confidence in valuations following a rally that had been underpinned by expectations of limited geopolitical fallout.

Investors are increasing cash holdings and reducing leveraged positions across major markets, according to fund managers. The reallocation reflects a broader move to hedge against prolonged instability, with energy stocks emerging as relative beneficiaries amid expectations of tighter supply.

Aaron Costello, head of Asia at Cambridge Associates, said markets had previously been conditioned to expect rapid reversals in geopolitical tensions but were now adjusting to the likelihood of escalation. Speaking at a Milken Institute event in Hong Kong, he said investors were beginning to factor in the depletion of reserves and stockpiles if the conflict persists.

Karen Jorritsma, head of Australian equities at RBC Capital Markets, said the speed of the selloff pointed to weak conviction behind earlier gains, with investors exiting positions quickly as risks mount.

Damage to critical energy infrastructure and supply routes is reinforcing expectations of lasting economic impact. Investors are closely monitoring developments around the Strait of Hormuz, a key artery for global oil shipments, as tensions raise the risk of prolonged supply constraints.

Recent disruptions have already affected liquefied natural gas flows, with nearly a fifth of Qatar’s export capacity reportedly knocked out by Iranian attacks, according to statements cited by Reuters last week. Market participants said such disruptions could have multi-year implications for contracts and pricing if sustained.

The prospect of continued supply shocks has led investors to reassess the effectiveness of potential policy responses, including interest rate cuts or diplomatic shifts, in offsetting the broader economic fallout.