Inflation will be the biggest problem facing Asian countries in the next 12 months, warns Aberdeen Asset Management investment manager Adrian Lim.
“Operating margins of Asian companies will be compressed by rising oil prices and inflation will be more than a passing shock,” he told Money Management.
Inflation in Asia is running at just below 4 per cent and some countries are introducing price caps or subsidies to keep oil prices under control.
However, another driver of rising inflation is food prices, in particular rice, which is soaring.
Lim said in developed countries such as Singapore and Hong Kong, food prices were not a problem, although rising oil prices will add to inflation.
“It is the emerging markets in Asia that are very prone to rising food prices and that could drive up inflation,” he said.
While some countries will make public statements about controlling food prices, Lim said it is an issue that is hard to manage.
Another problem with rising food prices is pressure on wages, as the cost of food is a larger proportion of income in these countries.
“Rising food and oil prices will only affect certain countries in Asia,” Lim said.
“For example, China has large oil reserves while India doesn’t. Indonesia is an exporter of oil.”
He argues that strong consumer demand will still drive growth in many Asian countries, ensuring the success story of the region continues.
“Gross domestic product estimates have fallen by only 1 per cent to 1.5 per cent since January despite weaker external demand,” Lim said.
“There is still a strong middle class in Asia that is buying consumer goods.
“But if inflation rises and the economy slows, luxury good purchases will be dumped overnight.”
He said there was scope to ‘pump prime’ strong fiscal and trade balances should consumer/investment sentiment dip, yet this may add fuel to inflationary fire.
“Ongoing market volatility should provide opportunities to buy,” Lim said.
But he offered no indication on whether the Asian investment cycle was at its bottom or when it will reach this nadir.
