Food price rises create emerging currencies opportunity

Record highs in wheat prices and the changing food consumption of emerging countries is strengthening the case for investing in the emerging currencies, according to HSBC strategist Phil Poole.

The firm’s global head of macro and investment strategy believes the recent rise in food prices could have a significant effect on emerging countries' inflation rates and creates an opportunity to ride the currency market.

‘Supply shocks that pressure costs higher are more likely to force up headline inflation than squeeze profit margins,’ says Poole. ‘As a result, in many emerging markets like India, Brazil, Korea, Malaysia and Israel rates are already being hiked to curb such pressures.

‘If this situation is aggravated by supply-side shocks from imported food, exchange rate appreciation becomes more attractive as a counter measure.’

The head strategist believes the inflation concern resulting from these price rises is biggest in emerging markets due to their consumption patterns in which food and energy dominate.

‘Food accounts for only 10-15% of CPI baskets in the developed world, but in India, Pakistan, Philippines and Vietnam it is more than 40%. In Russia the share of food is slightly below this while in China it is close to one-third of the CPI basket.’

He also believes that unless agricultural productivity or land supply rise, upward pressure on grain prices will continue.

‘Rice not wheat may be the major staple in Asia but sharply higher global wheat prices will likely lead to substitution into other grains, including rice, with a knock on effect on food prices more generally.

‘And with soft commodities now a tradable asset class in their own right investment flows will reinforce the effect, potentially driving food prices higher across the board.’