The Hindu Business Line : Inflation, not US, takes centre stage

In terms of inflows, Asia (ex-Japan) equity funds enjoyed their best week this year for the week ended April 2, fund tracker EPFR’s data showed. They soaked up a net $599 million, as investors found a little value in China, even as Taiwan seemed a safer bet after its Presidential election. However, India as an investment destination continued to be out of favour.

The grey clouds of inflation spiralling out of control, and its implications for interest rates were top of the mind.

For the week ended April 4, foreign institutional investors, many of who also run offshore funds, were net sellers to the tune of $431 million in India, Bloomberg data showed.

Inflation in India, based on wholesale prices shot up to touch the 7-per cent mark for the week ended March 22. This was a good 1.5-2 per cent than what the central bank, Reserve Bank of India, has stated to be comfortable with.

Food price inflation was, in fact, an Asian contagion that impacted many other Asian peers as well.

Reports suggested that it hit Vietnam the hardest with a 30 per cent spike in food prices in February, followed by China (23.3 per cent), Indonesia (13.6 per cent), Hong Kong (12.6 per cent) and so on.

Market fears are that the compulsion to temper runaway prices could force governments to either hike interest rates and sacrifice growth or address supply side issues.

Inflation

Despite the United States projected to slowly lose its position as biggest consumer and Asian behemoths such as China and India slated to substitute it in long-term, in the near term, inflation may bite into the purchasing power of these consumers.

This is one reason why inflation could spill water over the domestic consumption “story” for these economies, at least in the short-term. Plus, the ‘slow growth-slow inflation’ stance has not helped the cause for stock markets.

EPFR said that at the country level, all funds focussed on four of the BRICs (Brazil, Russia, India and China) posted inflows, as did BRIC Equity Funds.

But where is this money coming from? Global investors pulled $13.5-billion out of money market funds (mutual funds that invest in short-term debt instruments) for the week ended April 2.

stronger cues

This indicates that while investors are inclined now, to investing in stocks, they are perhaps waiting on the sidelines for stronger cues.

Options for them are drying up as emerging markets debt has been hit in recent weeks by fears that slower US growth will have also have an impact on the global economy.

As far as India is concerned, the March quarter results expected to be flagged off by Infosys on April 15 will be keenly watched.

Muted earnings growth may require investors to revise their view on stocks.

All said and done, like the rest of BRICs, India still remains one of the better hedges against an US recession.

But it remains to be seen how Asian governments and their central banks tread the inflation path.

Investors will be watching every move on that front.

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