Inflation is creeping across Asian markets, but there are still a number of compelling reasons not to avoid the smaller Asian markets, managers state.
A stock picker's environment
Cautious investors could do well to consider funds with a bottom-up investment approach. Inflation or not, one can still find companies that operate very well, said Lagger.
"If you look at the stock market of somewhere like Indonesia, inflation is still coming alongside very high growth. As an investor, you can still find companies able to manage this high price environment: branded food, tractor and commercial vehicle sales, for example, are sectors not interest rate sensitive," he said.
"The latest earnings we have seen are showing some market leaders are really able to bring out very nice numbers, despite the scenario of higher rates and higher inflation pressures."
In this context, another country of particular relevance is Korea.
Taewoo Kim, manager of the FF Korea fund, said a recent pickup in inflation is likely to be helpful to stocks in general, as fixed income is typically weak in such an environment.
Meanwhile, the real estate market is experiencing the aftermath of a boom-bust cycle, he said.
"The performance of the Korean stock market is generally not correlated to inflation, given the KOSPI index includes a large proportion of export-related companies that are leveraged to the global business cycle rather than local inflation. While banks and domestic sectors could be negatively affected as real income of local consumers will be reduced, we are seeing positive trends within department stores due to increased sales of luxury brands," said the manager.
Lo is also bullish on Korea. Her team is closely watching developments there, where equity markets have seen significant recent inflows, she said.
"There are exciting long-term trends taking place; and the country's equities have been undervalued for some time. Corporate earnings are rapidly growing as companies across Korea are becoming more competitive and have, since the financial crisis of 2008, taken a greater share of the global markets."
There is a compelling case for some countries, but granted an investor might find them difficult to access: the majority will be exposed to Chinese and Indian inflationary pressure via an Asian Pacific vehicle. Those concerned, however, may do well to follow the attitude of Jian Shi-Cortesi, Lagger's co-manager on the Julius Baer Chindonesia fund.
She categorises China and India's inflation as ‘healthy', seeing it a good result of growth: "Compared to some of the other countries with low growth and low inflation, I would still prefer these high growth countries," she said.
Will inflation in China and India continue to spiral?
China: Jian Shi-Cortesi
"The next few months are very data dependent and could see inflation remaining at a high level. The government could continue to raise rates if it sees high GDP growth alongside a high pace of inflation.
"When it starts to come down and policy ends, I think we can see the markets rising up quite nicely. In short term the picture is quite cloudy but I am confident on the medium term."
China: Peter Eerdmans
India: Vincent Lagger
"This changed the expectations and calculations of investors. Now people are thinking nine hikes is not the whole story, perhaps we have two or three more to come."