The disconnect between global expectations of deflation and signs of inflation biting in emerging markets, provides interesting investment ideas for hedge funds, as well as having implications for capital flows into funds.
That was what Dr Pippa Malmgren, an economic adviser and author of Signals and Geopolitics for Investors, told delegates at the Cayman Alternative Investment Summit, which took place in Grand Cayman last week (February 4-5).
Malmgren said that despite all the talk of deflation, what is really irritating people in China and Russia is the rise in commodity prices. Locally produced wheat in Russia is now at a record high and the cost of bread is also up sharply.
This is a big problem, she said, and the sort of thing that causes social unrest, as it did with the Arab Spring. Relatively few people in China actually own stocks, so the 50% rise in the price of pork between March and June last year is more significant for people than losses in financial markets.
“It’s a big problem for the emerging markets because the industrialised world has decided to inflate,” Malmgren said. “What we are seeing now is China and Russia looking to gain more control over the price they pay for commodities.”
It’s also the reason that China is buying major real estate like the Waldorf Astoria, because these prices will rise with inflation, she said.
The interesting opportunities, Malmgren said, begin with the companies that control the price of fish, which rose by 60% two weeks after sanctions were introduced in Russia. Defence spending is another part of the equation, as we have already seen military tensions rise as China builds little islands in the South China Sea, where the only thing standing between them and 10% of the world’s fish supply, is the US Navy.
“Everyone is talking about QE4 but what happens if that comes in the form of increased defence spending,” Malmgren said.
Dr Pippa Malmgren, Signals and Geopolitics for Investors, Cayman Alternative Investment Summit, Cayman