NEW YORK — There is nowhere to hide from inflation.
Prices in one in four countries, many of them in emerging markets, are
accelerating at a double-digit pace, which puts them at least two and a
half times the 4 percent annual U.S. headline inflation rate, according
to new research from Morgan Stanley.
That should be a wake up call for anyone counting on investments abroad
to prop up their portfolios as U.S. stocks teeter on the edge of a bear
market.
Sure, the “decoupling” strategy worked for investors in the recent
past. Foreign holdings fared better because international economies
were outperforming U.S. growth.
The U.S. economy has slowed to nearly a standstill in the last year
because of the mounting inflation and the collapse in the housing and
mortgage markets. Other industrialized countries have seen about a 2
percent average rate of growth while emerging economies have topped 7
percent.
That growth is now being threatened by inflation. And remember: In the
developing world, a larger portion of household expenditures tends to
go to the most inflationary items — food and fuel.
Food prices have jumped 39 percent from February 2007 to 2008, led by
wheat, soybeans, corn and edible oils, according to the International
Monetary Fund.
That hits residents of emerging markets much harder than those living
in more advanced economies. People in countries like Vietnam, Russia,
Egypt and India put at least 30 percent of their total spending toward
food, well above the 6 percent allotment for U.S. households, according
to U.S. Department of Agriculture.
That’s why Morgan Stanley economists Joachim Fels and Manoj Pradhan
said they were “flabbergasted” by their findings that 50 countries had
double-digit inflation rates. On that list were six of the 10 most
populous countries in the world, including India, Indonesia, Pakistan,
Bangladesh, Nigeria and Russia.
In total, those facing such pricing pressures accounted for 42 percent of the world population.
“In other words, close to three billion consumers are currently
experiencing double-digit rates of price increases,” they wrote in a
note to clients.
Soaring inflation is not easy to tame. Some countries, such as India
where inflation is running at around 11 percent, may have no choice but
to boost interest rates.
The Reserve Bank of India earlier this month announced an inter-meeting
rate hike. It said in a statement accompanying the move that the
“overriding priority for monetary policy is to eschew any further
intensification of inflationary pressures and to firmly anchor
inflation expectations.”
Others, however, will balk at tightening monetary policy because they
don’t want their currencies to surge, which would then raise the price
of their exports.
Many emerging-market economies also link their currencies to the
dollar, and because of the U.S. Federal Reserve’s loose monetary policy
stance right now — the central bank has aggressively cut interest rates
in response to the credit crisis — that has helped feed inflationary
pressures.
The longer inflation remains elevated, the more damage it will do to long-term economic growth.
“There is plenty of reason to worry about the continuation of the bull
story for emerging markets, especially in those countries that have
seen a sharp acceleration in inflation, are unable or unwilling to
tighten policy sufficiently, and are commodity consumers rather than
producers,” the Morgan Stanley economists wrote in their report.
But even as prices surge, earnings forecasts aren’t coming down in many
global markets. That may give investors false hope that many countries
will bypass the inflation storm.
For instance, in Asian countries outside Japan, earnings forecasts are
still for 11.6 percent growth over the next 12 months and 15.1 percent
growth in calendar year 2009, according to Barclays Capital.
Those estimates “are implicitly assuming that inflation will either
miraculously disappear on its own accord or that central banks are not
going to bother doing anything about it neither is particularly
believable,” wrote Tim Bond, head of global asset allocation at
Barclays.
Barclays is recommending that investors either avoid owning stocks in
that region or that they short shares, meaning bet they will decline.
“Although the area is currently outperforming in terms of economic
growth, the inflationary environment is not far short of disastrous,”
Bond said.
Clearly, the inflation bogeyman is haunting all corners of the world.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org
