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

Edward Tang, AsianInvestor
Mar 22, 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 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 the 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 of 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 GoImpact, and 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 o 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.