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Assets in commodity-rich emerging economies well-equipped to weather inflation

22 Mar 2022

US Federal Reserve rate hikes pose a bigger threat to emerging economies than inflation, and China can play a major role in the post-pandemic recovery, experts say.

Asia’s emerging economies are likely to weather the inflation and geopolitical woes plaguing developed markets today, with assets such as long-term bonds and commodity and energy shares presenting good opportunities to institutional investors.

However, rate hikes from the US Federal Reserve could have a profound effect on emerging markets, while China could have a major role in Asian markets’ post-pandemic recovery.

While the US battles record-high 7.9% inflation at home and Europe is preoccupied with an energy crisis and geopolitical uncertainties, emerging economies rich in natural resources and commodities will likely survive and could even thrive.

“Places like Indonesia and Malaysia have all the right materials and minerals. Their economic growth will be unimpacted (by high commodity prices),” said Mark Nash, head of fixed income at Jupiter Asset Management, in an interview with AsianInvestor.

“Their stock markets have held up well because they’re full of energy materials and mining types of businesses, and that’s positive for their markets,” he said.

He also singled out Indonesian long-term bonds as an opportunity. “Indonesia has low inflation. It’s got good growth. I’d imagine if they do get inflationary pressures, they will tap the brakes... and just flatten the curve.

“The yield in the long end of that market is actually pretty good. We do like being in the long end of that market,” he said.

Inflation in Indonesia and Malaysia stands at 2.06% and 2.3%, respectively, lower than India’s 6.07%, Thailand’s 5.28%, Singapore’s 4%, and the Philippines’ 3%.

However, Nash expects inflation to rise across the board in Asia this year, with the Indian rupee and Thai baht likely to come under strong pressure because of their reliance on energy imports. 

He added that in a risk-off situation, the demand for currencies such as the Indonesian rupiah, Malaysian ringgit, and Brazilian real is also expected to increase because of the favourable terms of trade their economies will enjoy from increased commodity prices.
 

US RATE HIKES

Emerging markets with substantial current account deficits and foreign debts - such as India and Thailand - are likely to be most vulnerable to the effects of the US Federal Reserve’s rate hikes.

"The impact of the rate hikes on Asian economies could be profound," said Clarence T'ao, co-founder of Golmpact, an impact investing financial services firm.

Fixed-income assets will bear the brunt of the rate hikes, depending on the average duration of the instruments and the steepness of the hikes, he told AsianInvestor.

“The US continues to be the largest trading partner of many Asian export-oriented countries. For Asia, many of our economies continue to be closely tied, one way or another, to the health of the US economy,” he said.

Meanwhile, the US move to raise interest rates by 25 basis points last Wednesday (March 16), with six more hikes expected for 2022, has raised concerns.

“We think the Fed is also walking a tightrope as they attempt to balance rising inflation with slowing growth,” an M&G spokesperson told AsianInvestor.

He added that there is a possible risk of a policy error – that is, either the hikes are too steep pushing the US economy into a recession or not steep enough to rein in inflation.

CHINA AS A GROWTH CATALYST

With the US preoccupied, China – the world’s second-largest economy - can play a major role in the recovery of Asian economies, especially emerging economies, that are dependent on Chinese markets, said Nash.

“I’m positive on China. I think like everyone else China found it hard to navigate the macro last year,” he said, citing as examples the government’s measures on regulatory crackdowns on tech companies, pandemic-induced factory shutters, and closing the poverty gap.

These measures, which the government felt were necessary for good reasons, should not spook investors.

“The chat that China is uninvestable is nonsense. That is simply not true,” he said, adding that investors are missing out on opportunities in China by “walking away from very good assets”.

China has one of the world’s lowest inflation rates – just under 1% - which gives it plenty of manoeuvring room to manage its economy at a time when the US is struggling to cope with rising consumer prices.

He expects China to cut rates – twice at the most this year - to boost GDP growth for 2022 after a fourth-quarter slowdown in 2021. 

Aside from being in a good position to tackle inflation should it become a problem, the government has also taken steps to manage the fallouts from corporate failures in the highly geared property sector.

“They are very serious about managing the leverage in their economy. And they're very quick obviously to tighten the credit reins when they think things have gone too far. We've seen that happen numerous times,” he said.

“I do think China is a relatively safe haven in a commodity boom, high inflation situation,” he said. For example, the country has an abundant supply of coal, wheat, and other commodities whose prices are kept in check by state controls to maintain stability.

But China can do more by moderating its zero Covid policy and easing factory lockdowns and border controls to resuscitate choked supply lines that have led to inflationary pressures on countries dependent on Chinese imports.

On Wednesday (Mar 16), Chinese vice-premier Liu He announced the government will roll out measures to support its capital markets and economic growth, sending Chinese and Hong Kong stocks soaring after massive sell-off in recent weeks.

Although the announcement fell short of expectations for a moderated Covid tolerance policy, Nash said it has helped to calm markets and assure foreign investors and trading partners of its commitment to economic growth.

China’s demand for raw materials and commodities remains an important source of emerging markets’ growth. It is the largest trading partner to many developing countries.

Any slowdown of China’s economy would present a risk to emerging markets and scuttle their post-pandemic recovery, he said.

¬ Haymarket Media Limited. All rights reserved.
 

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