Schroders EM head Conway fears recurring food inflation strife

Schroders' head of global emerging markets, Allan Conway, thinks Russia is looking cheap at the moment and has overweighted the country. Meanwhile, he thinks food inflation is one of the main causes of the unrest in Egypt and it will be a recurring theme for emerging markets in the years to come.

As demonstrations in Egypt entered their 16th day on Wednesday, Conway said:

'Food inflation is one of the key drivers of events in Egypt. A significant percentage of the population there are poor and so are disproportionately affected by food inflation.'

The lack of democracy there was not such an important factor, he thinks.

'Some of the best economic growth stories come from autocratic regimes; for example Japan, South Korea, Hong Kong and Singapore. But the benefits of economic growth were felt by an increasing portion of the population, not just a small minority. In China, for example, there is significant poverty in rural areas but they are seeing improvement, whereas in Egypt there has not been that trickle down effect and food price inflation has been making the poor people even poorer.'

He thinks the demonstrations have been 'stomach-led rather than head-led', which makes him believe there will be limited contagion effect in the Gulf region where GDP per capita is far higher.

Conway thinks food inflation will not have a follow through impact on core inflation in emerging markets and believes in a few months time 'we will move onto something else to worry about'. However, he thinks food inflation and the market volatility it causes will keep coming back to haunt emerging market investors.

'There is an underlying structural shift which is moving the food demand curve up overall, as 2.5 billion people in India and China will continue to consume more food as incomes continue to rise,' Conway said.

He thinks supply will keep increasing to counter the inflation threat, but that it will be an ongoing battle. 'Its is likely to a recurring and underlying problem. This is the second food crisis in two years and we will have to get used to this whenever there is bad weather or a bad crop.'

If rice were to see the kind of inflation which has affected wheat and other grain, that would be real cause for concern because of the billions who rely on it across Asia, according to the Schroders fund manager. 'There is always the risk of it happening with rice and we need to watch out for it, but we will probably avoid it.'

Meanwhile, in Schroders' emerging market portfolios, Conway and his team have moved overweight on Russia and underweight on Brazil and India. 'With its P/E ratio at 7 times earnings, Russia is the cheapest emerging market. It has strong fundamentals supported by the oil price,' Conway said.

He says that investors are right to continue to have concerns about corporate governance and the treatment of minority of shareholders in Russia, but these concerns are factored into the low prices.