HSBC: Stock Market Is Pricing in "Recession" Rather Than "Stagflation," Oversold Opportunities Emerging in Markets

Global stock markets are digesting the impact of Middle East conflicts with a recessionary logic. HSBC strategists believe that sharp sell-offs have created buying opportunities in some emerging markets.

In a research report on Tuesday, HSBC strategists Alastair Pinder and Pankaj Agarwala noted that since the outbreak of Middle East conflicts in late February, the market panic triggered by soaring oil prices has pushed the probability of a global recession from 10% two weeks ago to 35%. Meanwhile, the probability of stagflation remains only at 8%, with little change. This divergence indicates that current market sell-offs are more aligned with recession trades rather than the 1970s-style stagflation scenario that the market generally fears.

The two strategists stated that despite heavy selling pressure, some markets have become oversold, offering attractive entry points for investors. They highlighted that the stock markets of South Korea, South Africa, and Indonesia are oversold by about 5% to 10%; the UAE’s Dubai and Abu Dhabi markets are undervalued by roughly 10% relative to fundamentals, although the latter’s discount partly reflects geopolitical risk premiums.

Since late February, global equities have declined by approximately 5%. Continued oil price volatility has heightened concerns about stagflation risks, with cyclical sectors lagging defensive sectors by about 9%.

Recession pricing dominates the market, stagflation narrative is overstated

HSBC strategists clearly distinguish between stagflation and recession scenarios in their report. Despite increasing discussions about a “stagflation turn,” Pinder and Agarwala believe that the actual market signals point elsewhere.

“Our model indicates that the current market-implied recession probability is 35%, up sharply from 10% two weeks ago, while the implied stagflation probability remains almost unchanged at 8%,” they wrote.

This divergence suggests that market participants do not truly believe stagflation will become the dominant scenario. The sell-offs more likely reflect concerns over a sharp slowdown in economic growth.

Opportunities in oversold markets in Korea, South Africa, Indonesia, and the Gulf

At the specific market level, HSBC uses machine learning systems to calibrate each market’s decline against fundamentals, identifying several oversold opportunities.

Korea, South Africa, and Indonesia are estimated to be oversold by about 5% to 10%. HSBC notes that these three markets have relatively low exposure to rising oil prices, making their valuations particularly attractive. The KOSPI index in Korea was among the best-performing markets globally in 2025, but since the conflict erupted, it has experienced significant volatility due to high concentration in memory chip giants and sensitivity to energy prices.

In the Gulf region, the UAE markets have continued to underperform since reopening after brief closures. HSBC assesses that Dubai and Abu Dhabi stocks are undervalued by about 10% relative to fundamentals. However, strategists warn that this gap “likely reflects embedded geopolitical risk premiums in current prices,” which investors should consider.

In contrast, markets in Norway, Saudi Arabia, Malaysia, and Singapore have declined less than what macroeconomic shocks would justify, indicating they are markets where fundamentals have yet to fully reflect the downside risks.

Cyclical stocks outperform defensive stocks

On sector allocation, HSBC strategists recommend seeking cyclical sectors with defensive qualities rather than shifting entirely into defensive stocks.

“We favor cyclical sectors that remain resilient in a stagflation environment,” Pinder and Agarwala said. “Overall, we believe materials, industrials, and financials are relatively well-positioned.”

Conversely, HSBC identifies retail, travel and leisure, and media sectors as the “big losers” in a stagflation scenario, considering these sectors most vulnerable under demand contraction and rising costs.

Risk Warning and Disclaimer

Market risks are inherent; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Investment involves risk, and responsibility rests with the individual investor.