HSBC: Emerging market investors told to beware of the old-enemy inflation

17th March 2011

It says the sector is now worth US$400bn.

Philip Poole, global head of macro and investment strategy points out that inflation is already above the central bank's target rate in many emerging economies.

He is sceptical about many central banks' claims that this is due to temporary factors such as high food prices. He says the risk is that a supply side shock turns into self perpetuating inflation forcing a tightening of monetary policy.

But he says emerging markets face a conundrum, because if they raise rates when the Federal Reserve and other developed world central banks' rates are on hold, it will increase the interest rate differential.

Poole says this will mean emerging markets attract additional capital inflows from the lower yielding developed world.

 "Additional inflation in emerging markets could be the end result of ultra loose policy in the developed world and currency intervention in emerging markets, exacerbated by food and energy-related inflation pressures and rapidly closing output gaps," he says.

However HSBC says that inflation linked bonds offer a hedge against this and are currently affordable.

Jean-Charles Bertrand, chief investment officer, quantitative strategies says emerging market ILBs should always be considered part of an emerging market debt allocation in portfolios.

However, in the current economic climate, these present a particularly appealing investment opportunity.

Bertrand says a managed strategy approach is important because the magnitude of the acceleration of inflation varies between regions and countries, as inflation is dependent on a variety of factors such as each country's output gap, sensitivity to food and energy prices and the effects of expansionary monetary policy.   


See also: Shaun Richards: UK Consumer Price Inflation surges to an annual rate of 4.4%! It is time for a change at the Bank of England

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