How to invest during HIGH Inflation era? (Sept 2011)

What is the main risk for Asian economy? None other than Inflation. Across the region, fast-growing countries such as Singapore, Indonesia, India and China are reporting faster than expected price increases in tandem with their economic success.

To fight inflation, many countries already carried out their tools of tightening. We have Singapore who fights imported inflation via stronger currency. Meanwhile, other countries are going for the traditional way of hiking interest rate and increasing bank reserve requirement since last year. At first, Bank Negara Malaysia called it as "normalization", but it seems to be "containerization" going forward to contain inflation.

Who's fault?

There are 2 causes for the problem, which I categorized them into international and national. Among the international contributing factors were:

1. Loose monetary policies practiced by US and Europe, who slashes interest rate to almost zero and carried out large scale of asset purchases. Yet, it failed to rejuvenate a sustainable economy.
2. As a result, these easy-money flushing into Asia in search of higher returns is fueling asset bubbles here. Then, we raised interest rates, and this had lured even more money into Asia together with an even stronger currency.
3. Other then equity, easy-money also flown to Commodity markets, including food staples and basic materials. Also, searching for higher return in view of greater demand by Asian countries to produce or consume more. This had pushed up inflation.

In the other end, we have National factors such as:

1. Consumer spending has risen much faster than supply. This is very obvious in populated countries such as China, India and Indonesia.
2. While western countries facing high unemployment rate, our side is not only hiring, but increasing wages too. Hong Kong and Malaysia are implementing a minimum wage for the first time. Thailand is the next to follow. Who is going to absorb the higher wages? Definitely not companies, it's consumers.

So, how to invest during high-inflation era?

Equities. Although higher inflation did not bode well for the economy, but, the revenue and earnings of companies shown in the balance sheet is greater. In other words, inflation can show up in earnings growth for some companies. To protect our investment, we should select those companies that have sufficient pricing power to pass on the additional cost to end clients.