Inflation is picking up across Asia, which will hit households and businesses, but the region faces the threat of something worse: stagflation, a period when slow economic growth and joblessness coincide with soaring prices.
The war in Ukraine, spiking commodity costs and China’s slowdown are the key triggers, according to the International Monetary Fund (IMF).
While Asia’s commercial and financial exposures to Russia and Ukraine are relatively limited, the region’s economies are being impacted by Vladimir Putin’s war because of increased commodity prices and slower growth in European and North American trading partners.
The external headwinds that are hitting regional growth come at a time when measures to deal with the situation are capped. As elsewhere in the world, Asian leaders are managing a difficult balancing act of dealing with slowing growth and rising inflation.
I believe that monetary tightening will be required in most economies with the pace of the rollout dependent upon domestic inflation and external exposure.
The US Federal Reserve’s interest-rate increases – with more likely to come this year – are also throwing fuel on the fire considering Asia’s considerable dollar-denominated debt.
Last month, the IMF said it expected Asia’s economy to expand 4.9% this year, down 0.5 percentage point from its previous forecast in January. Inflation in Asia is now expected to hit 3.4% in 2022, 1 point higher than forecast in January, it said.
What should investors do?
We can expect stock markets to remain highly volatile as headwinds continue.
However, working with a good adviser, many investors will be seeking out the potentially hugely rewarding buying opportunities that are being presented by this turbulence.
They’re moving to pick up some high-quality stocks that have a solid future at what they will see as “discounted prices.” They will not want to miss out. After all, there are always winners and losers in bouts of volatility – and this is where a good fund manager comes in.
As I recently told the media: “Savvy investors are staying invested and, in fact, increasing investments and are not paying attention to or are spooked by short-term fluctuations and headlines.”
As ever, investors must ensure that their portfolio is adequately diversified. A considered mix of asset classes, sectors, regions and currencies offers protection from market shocks.
Stagflation can be viewed as a “worst of both worlds” scenario.
The risk of stagflation in Asia is real. But so too are the enormous opportunities it brings investors.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.