Asian hot money: Asia’s hot money is getting finicky. Investors seem spooked by inflation in emerging Asia's economies, leading this week to a hiccup in markets in India, Indonesia, the Philippines and Thailand. Indonesia saw the most alarming turbulence: its benchmark stock index tumbled almost 7 per cent over four days before regaining its footing. It's not the end of speculative money inflows, but it is a reminder that they can go both ways.
Much of the selling was done by the same investors who drove last year's massive rallies - foreigners. Armed with cheap dollars, they have poured into commodities and emerging-market assets, buying roughly $104 billion in Asian equities in 2010, according to Nomura. Indonesia led the region with a 46 per cent gain by its benchmark stock index. That deluge of cash, however, has worried Asian policymakers, prompting some to impose controls on cross-border investment flows.
For inflation to trigger a rethink sounds odd. Hot money rarely heeds macroeconomic data, since investors are typically more drawn by interest rate arbitrage, or strong growth. Besides, hot money itself tends to exacerbate inflation, so should not come as a surprise. But in this case investors may be right to worry. Asia faces rapidly rising prices for food and other essentials: India's wholesale-price index for food rose 18.3 per cent year-on year in late December. Such figures raise the risk of a policy overreaction, or worse, social unrest.
Other factors are at work too. Turbulence in Asia's markets reflects shifting global risks. Concern that Portugal may be forced to default on its debt has elevated concerns about emerging-market debt everywhere. But the bigger danger for emerging-market risk may be rising optimism about the United States. Rising US stocks and bond yields offer investors higher returns for lower risks. The yield on two-year US Treasuries has climbed 25 basis points since early November. Higher US rates also raise the cost of borrowing hot money for Asia. Investors are unlikely to stampede for the exits; they will still want a stake in Asia's growth story. Asian markets have bounced back somewhat. But investors are becoming less tolerant of threats to the sustainability of that growth. That may make investing in Asia a more volatile proposition.