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Asia should be on inflation alert: JPMorgan

Countries that let currency strengthen will be better off

(SINGAPORE) Inflation poses a bigger and more immediate threat to countries in Asia than a US economic recession, said a senior equity strategist.

Emerging-market countries that allow their currencies to strengthen in the next 12 months are more likely to see sustained economic growth and escape runaway price inflation later, said Adrian Mowat, chief Asian and emerging-market equity strategist for JPMorgan, in an interview with BT last week.

The JPMorgan view is that there is a roughly one-in-three chance of a brief recession in the United States, with the economy shrinking in the first six months of 2008, then recovering in the second half.

But the economies in Asia have been growing strongly despite weaker demand from the US, where economic growth has been slowing for some time now, he pointed out.

‘I think the real issue for our economies is that they’re growing very rapidly. And if there’s a concern it should be about price stability and inflation.’

So far, central banks in Asia have tended to keep their currencies relatively weak, intervening in order to prevent rapid appreciation, he said.

‘But as we go into 2008, you’ve got the Fed (the US Federal Reserve) cutting interest rates . . . yet we need to push up interest rates to deal with our rapid growth.’

The combination of lower interest rates in the US and higher interest rates and rising price inflation in emerging markets will put greater pressure on central banks in Asia to allow their currencies to strengthen further, he said.

His advice to investors is to favour stocks in markets with strengthening currencies – for now, mainly the Asean countries, mainland China and Hong Kong – as these are more likely to maintain rapid economic growth for longer.

In Singapore, JPMorgan estimates that the Straits Times Index of blue-chip stocks could reach 4,800 points by the end of next year, about 40 per cent above its current level.

Countries which continue to keep their currencies weak would likely see domestic asset prices rising faster in the near term – generating high returns to investors in those assets – but those countries ‘ultimately will end up with an inflation problem that will require higher interest rates and a reduction in growth’, he said.

Others, including senior economists, have also warned that rising price inflation is fast becoming a major risk in emerging markets due to surging food, oil and asset prices.

Philip Poole, HSBC’s chief emerging markets economist, told BT last month that he expects governments and central banks in these countries to step up their fight against inflation, and that investors in emerging market currencies, stocks, commodities and property stand to benefit from the inflationary pressures and the likely policy response in the near future.

Here, too, the latest indicators suggest that inflation is on the rise. According to official data released on Friday, the consumer price index in October rose 3.6 per cent from a year ago, the fastest year-on-year increase in the monthly indicator of consumer price changes since August 1991.

The Monetary Authority of Singapore said last month in its twice-yearly monetary policy statement that it would allow the Sing dollar to strengthen at a slightly faster pace than before to curb inflationary pressures, while maintaining its long-standing official policy of allowing a ‘modest and gradual appreciation’ of the currency.

 

Source: Business Times 26 Nov 07

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