Asian stocks offer inflation hedging potential

As rising inflation continues to be a major source of concern across Asia, Mike Hanbury-Williams, manager of the F&C Pacific Growth and F&C Asia Pacific Dynamic funds, believes the region remains structurally attractive, with a large number of stocks offering strong inflation hedging potential.

"Inflation has clearly become a growing issue in the region and it's something that must be watched for closely. It is largely the result of the very strong economic growth delivered with the assistance of monetary policy that has been too loose for too long," he said. "The good news is that the authorities are very aware of the problem and are starting to take appropriate action. While this may have an impact on growth in the short-term, we believe the region remains structurally very attractive."

In this environment, Hanbury-Williams focuses on companies with strong cashflow, operating in areas with pricing power and strong branding. "Countries that have built up their foreign exchange reserves, run current account surpluses, have companies with strong balance sheets, and consumers that are not overstretched will be in the best position to deal with the balancing act between controlling inflation and maintaining economic growth."

Whilst Hanbury-Williams has investments in the more traditional inflation hedges such as gold, through Lihir Gold for example, he is also "tapping into the growing wealth of the middle classes providing products and services that are hedges against inflationary pressure." Here he cites two potential areas, healthcare and education. Recently Hanbury-Williams has bought China Medical Technologies a company that manufactures medical devices. "Medical reform proposals were passed in March and the central government has increased the healthcare budget by 25% for 2008."

A stock he currently favours is Singaporean company Raffles Education, already independently recognised for university level education, is now expanding into college, and primary education in China and India." The Chinese middle class wants to provide their children with the best possible education, something enhanced by the country's one-child policy. Raffles benefits from this strong domestic demand and a much lower cost base than its global competitors which gives it the ability to drive revenue growth, whilst remaining competitive," he said.

Asian companies are also benefiting from high commodity prices, in particular the current record high oil prices. Hanbury-Williams mentions Cairn Energy India as a good example of this trend. "Cairn's investment in proving up resources and infrastructure is coming to an end and they are now progressing towards the production of high quality oil. The company should be a beneficiary of an oil price expected to stay high for a prolonged period, underpinned by the rapid economic growth within the region," he added.