Inflation and the developing world – where are the opportunities?

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All information is correct as at 30 April 2022 unless otherwise stated.

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The surge in inflation this year has sent shockwaves through the global economy and financial markets.

For those of us in the UK, it’s natural to focus on how inflation impacts us closer to home. News from the US is also prevalent, as prices from across the pond recently climbed at their highest rates since 1981 – rising 8.3% over the year to the end of April 2022.

Lots of us are likely to be less familiar with the inflation story in Asia Pacific and emerging markets. Importantly, the developing world is vast and diverse. The economic backdrop and growth prospects for one country isn’t necessarily the same for all.

The inflation story so far

Inflation rates have so far remained below target in countries like Thailand, Indonesia, and China. In Japan, inflation has been stagnant for decades.

While energy inflation has surged in many parts of the world, Asia Pacific has tended to experience less pressure on food and other core prices. Food is a key part of what happens to inflation here because it makes up a much greater proportion of overall spend in emerging markets. On the face of it, food prices could hit households harder.

Food self-sufficiency varies between countries though. The Philippines, for example, depends more on importing food. But agricultural conditions mean some markets have more control over their food production. For instance, Australia and Thailand export more agricultural products than they import and could be more insulated from rising food prices.

Differences in consumption habits could also help some markets. Russia and Ukraine make up for around 28%of global wheat trade, and the ongoing war means the price of wheat has soared this year. But the price of rice – a key staple food within Asia – has been relatively stable. India also recently imposed a ban on wheat exports, putting further pressure on food costs.

The reopening of some Asian countries has also lagged other developed markets. So demand for goods and services might have not bounced back fully and put the same pressure on prices. Companies in some countries, like China and Japan, have also so far been in a strong enough position to absorb cost rises, rather than pass these on to the consumer.

The inflation story is likely to change for many countries though. As Covid-19 vaccinations continue to roll out and economies reopen, demand for goods and services is likely to pick up. Combine this with a shortage of goods globally, and this could see prices rise as we’ve seen in the west.

That said, by the time more economies get back to normality, the goods shortage and energy inflation might have begun to ease.

Latin America is also experiencing inflation. But as a major exporter of natural resources, it could follow a different path.

The region could benefit most from global sanctions against the use of Russian resources – this is because it’s also a metals and energy producer and has lower exposure to gas markets. Agricultural exporters, including Uruguay, Brazil, and Argentina, could also fill in for some lost supply from Ukraine.

Latin America has a history of high inflation, so its central banks have tried to be on the front foot and taken action. Some of the world’s most aggressive rate rises have taken place here – Brazil’s central bank recently raised its interest rate to 12.75% in an effort to stem inflation. Inflation could still present challenges though, especially as the country has a large low income and working-class population.

Other countries are looking to tighten financial conditions too. India – an oil importer – is expected to raise interest rates in the coming months, while Indonesia is also expected to raise rates by the end of this year.

Fresh lockdowns in China

China handled the pandemic better than many other economies in 2020, and at the time, had less of a need to stimulate the economy. However, a recent surge in Covid-19 infections has triggered lockdowns in several major cities – at the time of writing, this includes Shanghai and parts of Beijing.

China has implemented a zero-Covid policy, but it remains to be seen whether it can contain the virus over the longer term.

It’s also implemented strict regulation in sectors like technology, private education, and property in recent years. This could impact growth and, combined with fresh lockdowns, could lead to looser monetary policy to help stimulate economic activity. By looser monetary policy, we mean lower interest rates and printing more money.

Factories have also had to shut down, and production and operations have halted for some industries. This, along with shipping delays at ports, could cause supply chain disruption – companies globally could experience delays in receiving manufactured goods. Again, increased demand but lower supply, could add to the inflation conundrum.

The impact might be less severe than in 2020 as previous supply shortages are now unwinding but, either way, uncertainty remains.

Inflation in China is currently at 1.5%, and lockdowns could suppress consumption and keep the ravages of inflation at bay in the near term. Prices are also generally more controlled in China, which is in-keeping with its ‘common prosperity’ agenda and aim to try to protect low-income families.

This means that companies might have to bear the brunt of any rising raw material costs though, which has the potential to impact earnings.

Looking ahead

What happens in Ukraine is likely to continue to have a big impact on what happens to global markets. The removal of Russia as a potential trading partner for large parts of the world could help increase investments in other emerging markets.

Some countries have already started to increase their spending on renewable energy, for example, which could increase opportunities for companies and reduce reliance on global energy suppliers. This will take time and significant spend though.

Certain emerging countries have tools in their belt to help their economies. But higher commodity prices could still push food and energy inflation higher and lead to additional interest rate rises. This could help combat inflation, but could also weigh on how much the economy grows.

As demand and higher food and energy costs soften, inflation has the potential to peak mid-way through this year and then start to trend down. This could eventually lead central banks to bring tightening cycles to an end and present new opportunities to investors. Nothing is certain though and we’ve already seen how quickly things can change.

Investment opportunities

Lots of global stock markets, including those in the Asian and emerging world, have had a tougher start to the year. That’s not all surprising given the potential impact of rising costs on both consumers and businesses, as well as the war and fallout of the pandemic.

Valuations across the region are relatively attractive. In particular, Chinese shares look good value compared with history. Though as always, past performance isn’t a guide to the future.

This presents opportunity for long-term investors. But a backdrop of geopolitical war, a surge in inflation, rising commodity prices and a pandemic means we could see more volatility in the short term.

What’s important though is that investors focus on their longer-term goals and appetite for risk. We think Asian and emerging markets offer long-term growth opportunities, as well as diversification away from more familiar markets like the UK and US.

Economic events and sentiment can have a big impact on markets in the short term. But in the long run, performance should be driven by how well companies do and their earnings potential. This is where investing with an experienced fund manager can help.

Lots of fund managers will focus on the potential for prospects of individual companies, which they think will prove resilient over the long run, rather than only the broader economic or political backdrop.

Tracker funds are also available for those who favour a simpler investment approach. These funds simply aim to track the performance of a particular market, instead of investing in a smaller number of companies that have been purposefully selected for their performance potential.

Asian and emerging markets funds could be used to diversify a long-term, global investment portfolio. These markets are higher risk as they're at an earlier stage of development. So these funds should only be considered for a portfolio with a longer investment outlook that can accept periods of high volatility.

This article isn’t personal advice or a recommendation to invest. All investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure an investment is right for you, ask for financial advice.

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

For more information on each fund, including charges and key investor information, visit the funds section of our website.

FSSA Asia Focus

A range of Asian economies are included in this fund, such as emerging Asian countries, like China, India and Taiwan. As well as more developed Asian economies, including Singapore and Hong Kong. It’s focused on larger companies in consumer-related areas, as well as some medium-sized companies with strong growth potential.

Fund manager Martin Lau, is a highly experienced Asian investor. He uses a more conservative investment approach and aims to find businesses that could prove more resilient during tougher market conditions.

Find out more about FSSA Asia Focus, including charges

FSSA Asia Focus Key Investors Information

iShares Emerging Markets Equity Index

This fund aims to track the performance of the broader emerging stock market, as measured by the FTSE Emerging Index. It invests in a broad spread of around 1,700 companies based across emerging countries, including China, India, Brazil, South Africa, and Taiwan. It also invests in lots of different sectors, like technology, financials, consumer services and materials. It's a convenient way to invest in the emerging markets.

While it’s mostly invested in large companies, it can invest in smaller companies too, which adds risk.

Find out more about iShares Emerging Markets Equity Index, including charges

iShares Emerging Markets Equity Index Key Investors Information

Jupiter Asian Income

This fund is different to many other Asian and emerging market funds as it aims to pay a regular income in addition to some investment growth, rather than only growth.

Dividend-paying companies have the potential to act as a hedge against inflation, especially if they have more resilient cashflows and can continue to pay dividends in more difficult times. The fund’s charges are taken from capital, which can boost the yield but reduce some of the potential for growth.

Jason Pidcock, the fund’s manager, mainly focuses on larger businesses in developed Asian markets, such as Singapore and Australia. The fund invests in emerging markets as well, and currently has some exposure to markets like India and China. However, the fund’s recently reduced how much is invested in China. The fund invests in a relatively small number of companies which can add risk.

Find out more about Jupiter Asian Income, including charges

Jupiter Asian Income Key Investors Information