This year’s sharp slowdown in US activity would have posed a significant problem for Asian markets in previous cycles, but this time, while the region is not immune, robust intra-regional trade and strong domestic demand are helping to cushion the blow. China’s economy, for example, is likely to grow by 10 percent this year, despite the difficulties it has faced in the form of extreme weather in the first quarter and the recent earthquake. This growth continues to create significant wealth, which in turn is fuelling a burgeoning consumer sector. The beneficiaries of this theme are to be found in domestic companies involved in the retail, advertising, medical, wealth management and medical arenas.
Industrialisation, urbanisation and infrastructure programmes are also continuing to underpin regional demand for raw materials, and suppliers of coal, iron ore and steel feature in our portfolios to this end. Rises in the prices of soft commodities have also been in the news and this theme presents investment opportunities in the form of palm oil and potash producers.
Increases in the prices of oil and food represent a key risk to the region, with the threat of inflation leading to concerns about the sustainability of growth. In China, for example, where food accounts for about a third of CPI, pork price rises have seen headline CPI rise significantly in recent months. However, the strength of China’s fiscal position gives the authorities the flexibility to absorb food and oil price pressures through increased subsidies.
The policy response to the inflationary threat varies across the region. Interest rates have been rising in China and Australia but some central banks are prepared to tolerate rising prices for fear of stunting growth. Fiscal measures, in the form of subsidies on fuel and food, are also being used, but these costs are rising. Heavy oil importers such as Korea and India are likely to see their currencies weaken in response to widening external deficits.
The increased focus on rising inflationary pressures in Asia currently has implications for stock selection. Our portfolios will continue to be positioned in the energy and commodity stocks that have pricing power, while avoiding the industrial companies that are being squeezed by rising input costs.
Vanessa Donegan, head of Far Eastern equities, Threadneedle and manager of the Threadneedle Asia Fund.
