Business | Markets
Inflation exposes emerging Asian stocks to hungry bears
Emerging Asian stocks have been hammered as a growing inflation problem slices into domestic growth, paving the way for a bear market after five years of double digit returns.
- Reuters
- Published: 00:00 June 7, 2008
Hong Kong: Emerging Asian stocks have been hammered as a growing inflation problem slices into domestic growth, paving the way for a bear market after five years of double digit returns.
Consumer prices are expected to continue to soar, as governments across Asia cut energy subsidies to save their budgets. As they do, expect more pain, especially in countries with low or no current account surplus that import a lot of their food and energy needs, such as India, South Korea, the Philippines, Thailand and Vietnam.
In those countries - especially those with exchange rates tightly woven to the dollar - governments have relatively few weapons at their disposal to shield consumers from higher prices.
The attraction for investors of low labour costs, high productivity and, most importantly, solid returns has faded.
Asian equities excluding Japan, which returned an average 28 per cent between 2003 and 2007, have bounced from their March lows but are still down more than 10 per cent year-to-date, according to an MSCI index.
"Global inflation will be a big determinant of whether we will get a bull market in stocks again because it's a big worry now," said Geoff Lewis, head of investment services for JF Asset Management in Hong Kong.
Lewis' firm, which oversees about $65 billion, sold some of its Chinese stocks last month due to inflation concerns.
In the last few months, Asian political leaders have had to bow to oil prices, which have doubled in the last two years, and to the surging cost of grains and other food items.
India, Indonesia, Malay-sia, Sri Lanka and Taiwan have cut budget-draining fuel subsidies at the risk of depressing consumer spending and fuelling political unrest.
Sean Darby, equity strategist with Nomura Securities in Hong Kong, said the shock from higher inflation is only the beginning.
"From the second quarter of 2008, companies will face the prospect of a slowdown in new export orders. In the third quarter, unplanned inventory build-up in the US will likely cause Asian exporters to either seek to 'dump' products overseas or acknowledge that inventory will have to be written down," he said in a research note.
Commodity sales
Darby favours holding companies that will still benefit from high volumes of commodity sales not necessarily high prices, like Thailand's Precious Shipping and Japan's Mitsui OSK. JPMorgan's emerging Asia equity strategist Adrian Mowat believes emerging market growth is slowing enough to drag oil prices lower and as a result investors should switch from commodity-related sectors to the technology and financial sectors, hoping for revived consumer demand in developed economies.
Among his top picks are Samsung Electronics, TSMC and Lenovo Group and Industrial and Commercial Bank of China and Bank of Communications.
In the short-term things will likely become worse for countries such as India and Vietnam, as higher fuel prices work their way through their econ-omies.
In the first three months of the year India's main BSE index tumbled 23 per cent, the largest quarterly decline since 1992.
Annual inflation in India is at 8.1 per cent, the highest in three-and-half years, and the country is running a current account deficit of more than $5 billion.
Vietnam, which only a year ago was being hailed as the next high growth opportunity in the region, has seen its stocks plummet nearly 60 per cent so far this year as annual inflation has climbed above 25 per cent.
For now, double-digit inflation and poor returns have not caused a wholesale rush to the exit among foreign investors.
For example, Japanese investors have been big long-term buyers of emerging Asia stocks. Naomi Fink, Japan strategist with Bank of Tokyo-Mitsubishi UFJ, said she has not seen client money move from Asia en masse because of inflation.
More from Markets
More from Business
Business Editor's choice
-
Saudi-Bahraini economic ties hit new high
Whilst press reports continue speculating on a possible new political structure defining ties between Saudi Arabia and Bahrain, facts on the ground confirm ever- stronger economic ties between the two neighbours
-
Cupid targets the Fed with early tweets
Declarations range from pure romance to cute overtures and racier fare
-
Do unemployment figures flatter to deceive?
Jobseekers and recruiters give out mixed signals ranging from optimism to downright despair even as official data show recovery
