Asia - Should we be concerned over inflation?

According to Jan de Bruijn, manager of the £101 million Gartmore Pacific Opportunities Fund, there appears to be a mismatch in Asia at the moment.

On the one hand, fears of a double-dip recession abound whilst on the other hand, inflationary concerns have resurfaced. Jan considers this quandary to be a contradiction in terms. Whilst either of these fears could happen, both could not.

Jan believes that "neither of these concerns will come to fruition in Asia this year. This is due to the combination of continued strong economic numbers, increasing consumer confidence, growing exports, rising GDP and still lax monetary policy. Asia can avoid another downturn because the governments in this region continue to have a lot of tools at their disposal to act decisively if required."

He continues: "What we are seeing is a significant boost in intra-regional trade amongst emerging economies in the rest of the world and a sizeable increase in the proportion of the middle class in Asia. This creates a large pool to buffet external negative factors."

Some countries in the region, in particular India, have exhibited the beginnings of inflationary pressures as their economies recovered strongly. However, recent numbers are beginning to show moderating inflationary pressures and Central Banks have been pre-emptive in raising rates. Furthermore, current interest rates remain low compared to historical norms. Jan believes that this provides these countries with the scope to increase interest rates without negatively impacting the economy since monetary policy remains relatively relaxed. He also expects that inflation will continue to decline over the second half of the year for technical reasons.

What does this all mean? Jan believes that, "the rest of the year is likely to continue to throw up both good and bad news. Markets are expected to remain volatile and we should expect trading volumes to remain low as investors remain uncertain over the future. This will continue to present a stock-pickers market. The key decision for the rest of 2010 will be our position in India and China. The consensus suggests an overweight in India and an underweight in China but this may change during the second half of the year."