We believe inflation is likely to remain subdued. Most Asian countries are commodity importers, and we hold the view that inflation is already a problem in India and may become one in China, given the rapid rise in money supply over the past year and healthy level of the money multiplier.
China embarked on monetary tightening early in 2010, while Indian authorities have withdrawn all special stimulus measures they had instituted in 2008. Hence, volatility relating to the nascent or real threat of inflation will occur early in the year, given the proactive stance of policymakers.
Concerns remain over Indonesia’s readiness to tackle inflation with aggressive rate hikes. Hence we are advising investors to take profits on Indonesian assets for now, which are fully priced in the short term, although Indonesia remains a market with great long-term potential.
Economists can never be too sure of the time-lag between stimulative policies and the onset of inflation. Should inflation appear sooner than anticipated, Asian governments will likely accelerate the pace of currency appreciation.
Hence, we believe investors should bet on Asian currency strength for the next two-to-three years. It addresses both inflation and long-term Asian growth re-orientation.
In addition, investors should own commodities and precious metals. After all, a spike in commodity prices contributed to the busting of the global asset price bubble in 2008. This could repeat itself considering the resilience of the price of oil and the severe drought that many Asian countries are experiencing.