Oliver's Insights - The threat of inflation in Asian and emerging markets
4 February 2011 - This note looks at the issue of rising inflation in Asian and emerging countries generally, which is now starting to weigh on the relative performance of Asian and emerging market shares.
The key points are as follows:
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- So far the rise in inflation in Asian and emerging countries is largely due to higher food prices. Non-food inflation remains reasonably benign.
- With strong growth having used up excess capacity and monetary conditions remaining easy, a flow on to higher non-food inflation is a growing risk. As a result, further monetary tightening in Asia and the emerging world is expected.
- This is positive for Asian and emerging country currencies generally, but is likely to continue to act as a dampener on emerging market shares relative to traditional global shares over the next six months. It may also start to weigh on industrial commodity prices, although this will be offset to some degree by stronger growth in developed countries.
- Our cautious short-term stance on emerging market shares doesn't alter their favourable long-term outlook.
