Sydney Morning Herald: ‘It’s American driven’ – US holds the keys to Asian inflation

This article was written by Lucy Battersby and published in The Sydney Morning Herald on April 3, 2021.

The US government holds the keys to the lock keeping inflation under control across Asia and Australia, with the head of Antipodes Asia Fund saying it could all come down to how much stimulus the Biden administration can pump into the US economy.

Rising consumer prices were already a post-earnings season concern for equity investors amid an accelerating economic rebound and the arrival of the Biden Administration’s $US1.9 trillion COVID relief package last month.

A further $US2.25 trillion in infrastructure spending – revealed by Biden last week – is seen as another likely inflation accelerant, further stoking concerns that central banks will raise rates sooner than expected to keep prices in check.

Biden’s bill still has to run the gauntlet through the US Senate – where it is likely to face opposition from Republicans and moderate Democrats – but Sunny Bangia, fund manager of the Antipodes Asia Fund, said the package nonetheless had the potential to drive prices upwards in Australia and in neighbouring countries.

“If the Biden administration were to implement an infrastructure stimulus, that would just put more pressure on commodity prices and that would probably put a huge pressure on commodity prices in Asia,” he said.

“Its unprecedented. It’s very US-driven. You don’t see the same inflationary pulse across Asia or Europe.”

Inflation concerns have been a key influence on equity markets both home and abroad in the post-earnings season period.

Yields on 10-year US government bonds entered the Easter break at near pre-pandemic highs, while long-dated yields in Australia are near levels not seen since April 2019, a sign economies are accelerating, and firming the perception a central bank rate hike will be brought forward.

High-growth sectors such as technology are particularly susceptible to rising bond yields, with investors more likely to turn to cyclical names instead of companies whose valuations have run red-hot.

Mr Bangia pointed out that China’s experience with inflation and leverage ten years ago had the government very sensitive to anything that could potentially create instability.

This was why the Chinese government stepped in to stop Jack Ma’s fintech Ant Group from floating on the Hong Kong stock exchange in late 2020, in what was expected to be the world’s largest float valued at $US34.5 billion.

“With the (Chinese) government, you go through these periods of regulatory enforcement,” he said.

“Typically it is because they want to fix something they think is not right for the nation. And you just have to work through it. Jack Ma made a big song and dance, but the path that (Ant Group owner) Alibaba is taking is the right one. They are adapting and listening to the regulatory issues.”

Mr Bangia has been covering Asian equities for more than a decade, and recalls Chinese authorities working hard to get inflation down and de-leverage their economy after they released a 4 trillion RMB stimulus in 2008 (about $795 billion in today’s money).

He said while the US was now launching one of its biggest ever stimulus packages to help its own economy recovery from the COVID-19 pandemic, Asian stimulus this time around had been more private-sector driven and balanced.

“The greatest worry about inflation has been in the US. Less so in Asia and less so in Australia,” said Bangia.

“We haven’t seen this level of M2 (monetary supply) growth in the United States for a very long time. A lot of cash is hitting a lot of household balance sheets.”

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Feature Image: Sydney Morning Herald
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6 April 2021