I would argue that investors should balance the short-term risks against the longer-term attractions of investing in the world’s most economically dynamic region. In the wake of recent falls, high quality stocks can be bought at historically cheap valuations.
The main concern surrounding inflation in the region is that central banks continue to pursue expansionary or at best neutral monetary policies.
More recently, there has been a realisation that inflationary forces will not go away quickly. Indeed, in the short term, the unwinding of unaffordable oil price subsidies could exacerbate inflationary pressures. With prices rising at more than 11 per cent annually in India, almost 8 per cent in China and 27 per cent in Vietnam, there are concerns that the prices genie may be out of the bottle.
It is possible that markets are worrying about the inflationary threat at a point where some inflationary forces, like soft/agricultural commodities, may have already peaked. Today’s record energy prices may also be at a peak for this year. Until there is evidence of a sustained reversal, however, investors will continue to look for a stronger policy response to rising prices.
Even with these concerns, the long-term argument for investing in Asia remains compelling. GDP expansion is likely to remain strong, despite the US slowdown. Forecast growth of 7.5 per cent for Asia ex-Japan is around three times the expected growth in Japan, the UK and Europe.
The economy is supported by robust national savings which have grown five-fold in 20 years. Consumer and corporate debt levels have fallen sharply over the past 10 years while government balance sheets are healthy.
We remain positive on two major growth themes in Asia – infrastructure and agriculture. Emerging market infrastructure spending is set to more than double in the next 10 years, reaching a total of almost $3,500bn. Most of this will be in Asia.
There are many ways to play this expansion by investing up and down the infrastructure supply chain. This starts with mining and takes in the shipping and logistics companies that transport materials to and within the region. Construction companies are obvious beneficiaries of the infrastructure boom but so are the banks that finance them and the equipment companies that supply them.
It is a similar story in agriculture, which is about much more than just food production. Seed, fertilisers, pesticides and equipment are all required by farmers. They need logistics companies to ship their produce to market, food and beverage companies to add value to the raw materials and finally supermarkets to sell them.
Often the best exposure to the value added through the supply chain is not in the country where demand is located. A stock we like is Leighton, an Australian engineering and construction company that is expanding its Asian business into India and the Middle East and potentially into Mongolia and Russia.
David Urquhart manages the Fidelity Asian aggressive fund