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Asian Inflation Crisis

Written By Brian Hicks

Posted August 2, 2013

If you’re like most investors, you’re looking at the Asia inflation crisis with a magnifying glass. You’re scared about your investments and trying to decide what to do with them. To understand what you should do with all of this unpredictability, it’s important to know what is going on.

Last month, South Korea’s inflation rose to the highest level in five months, according to Channel NewsAsia. This may sound like a lot, but it was only an increase of .2 percent from June, and according to the Bank of Korea, the figure is still at a comfortable level. The target range is 2.5 to 3.5 percent.

against inflationWhy is it so high? This target range was instated because it gives the nation room for growth.

While the inflation in Korea hasn’t risen to cause a concern, it doesn’t mean it’s not going to. Actually, the Bank of Korea expects it will rise 2.1 percent in the second half of the year, coming close to the target range. The rising inflation is due to the rise in food and utility prices. In June, food prices soared 4.9 percent. Property is another concern because that is rising as well.

China isn’t fairing much better. It’s economic growth has slowed as much as 7.5 percent. This is .2 percent less than the previous quarter. On Monday, more information will be available that may help explain the growth slowdown – the Statistics Bureau will report on gross domestic product, factory output, investment, and retail sales.

In Indonesia, inflation rose in July too, as Reuters reports. This grew the trade deficit significantly. The central bank may now tighten the monetary policy to help the rupiah, but this could also run the risk of inhibiting the country’s growth.

With the inflation and growth slowdown, you’re probably wondering what everyone is doing about it. Thailand’s central bank, for its part, ceased its hold on inflation and started to work on stabilizing the exchange rate to help bring in revenue, according to the Wall Street Journal.

As you can see, the Asian markets are dealing with inflation, and there’s no sign of it stopping. It’s important that you know what to do about this situation if you’ve been betting on Asian currency. You may want to start thinking about investing in U.S. dollars instead.

This is against what most Asian countries do in this situation. Most Asian central banks target inflation to send the effects through the market. Thailand, however, just wants to protect its currency, which may end up working – or it may not. It’s certainly something to try.

What Investors are Doing (and What They Have Done)

Up to this point, investors have started to bet against Asian currencies, instead going after U.S. currencies. This has led to the devaluation of Asian currencies. Governments could have helped the situation by boosting purchase prices, but they didn’t, and it’s probably due to their lack of capital reserves.

What’s important for you to know is that this situation has happened before. The Asian financial crisis of the ’90s was similar to the one today, and it recovered beyond anyone’s expectations.

In 2008, Richard Widows from the The Street had this to say about the Asia financial crisis:

The current crisis bears remarkable similarities to the Asian economic crash that started 11 years ago this month — first a devaluation of the Thai currency, then a major collapse of markets and currencies throughout East Asia. Yet, those who bought mutual funds with holdings in that region 10 years ago, when the outlook in that region seemed bleak, experienced explosive growth over the subsequent decade.

Funds that have quadrupled or better in the 10 years since the depths of the “Asian contagion” are summarized in the accompanying table. A second list shows some beaten down funds that optimists might consider in these uncertain financial times.

Asian crisis chart 8-2-13Source: Ratings from 6/30/2007

History tends to repeat itself. Just as Asia recovered before, it will recover again. Whether you stay with the Asian currency or flee towards the U.S. dollar depends on how much you can deal with the volatility.

Just keep in mind that it’s always good to diversify your portfolio. Keeping some of your Asian investments around, while adding some U.S. ones, may offset some of the loss, and when things turn around, as they always do, you’ll still end up gaining.


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