(Bloomberg) -- An out-sized selloff in Asian shares on Tuesday is underscoring concerns about the region’s fragility in the face of elevated interest rates and rising geopolitical tensions.

The MSCI Asia Pacific Index dropped as much as 2.2%, the most since August last year. The slide means it is now less than 1% away from erasing its 2024 gains. The S&P 500 lost 1.2% on Monday but is still up 6.1% for the year.

Traders worry that persistently high borrowing costs due to a resilient US economy as well as rising oil prices will hurt Asia more given the pressure from a stronger dollar and the region’s energy dependency. Lingering doubts about China’s growth recovery after a mixed bag of first-quarter data also dimmed hopes for a sustained improvement in Asian earnings. Regional stocks underperformed their US and European peers in 2023.

“Asia, with its many import-dependent economies, could be particularly vulnerable to a stronger US dollar, which often accompanies Fed hawkishness,” said Manish Bhargava, a fund manager at Straits Investment Holdings in Singapore. Valuations growth, rather than fundamental economic strength, has been a bigger driver for the region’s equities, he added.

Read more: Dollar Bulldozes Its Way Through Asian Currencies Aided by Yuan

Almost all of the Asian stock gauge’s advance over the last 12 months results from a 6.5% expansion in valuations, while earnings estimates have barely changed, data compiled by Bloomberg show. In contrast, the MSCI World Index of developed markets has seen more than 6.5% growth on both fronts in the same period.

While the Asian index is estimated to deliver year-on-year profit growth of 4.1% in the January to March period, the first expansion in eight quarters, the outlook for the rest of 2024 is now in doubt in the face of a Federal Reserve that appears no longer in a rush to cut rates.

“Asian markets and economies appear particularly vulnerable due to the anticipation of prolonged higher US interest rates, which has been reinforced by statements from Fed officials,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities Pte. There can be pressure on currencies, investment flows, economy, monetary easing cycles and trade, he said.

A delay by the Fed is seen causing central banks in China, South Korea, Indonesia, the Philippines and Taiwan to postpone rate cuts, Morgan Stanley economists led by Chetan Ahya wrote in a note.

Meantime, China’s recovery prospects look far from certain after data showed that while its economy expanded faster than expected in the first quarter, disappointing retail sales and industrial output in March showed the momentum already started fading.

(Adds Maybank’s comments in seventh paragraph)

©2024 Bloomberg L.P.