Currency hedging & Inflation predictions

The past year has been particularly difficult for oil-importing countries such as India and Indonesia, whose currencies have fallen to new lows against the US dollar.

We see huge potential in India, but at the moment the currency is making it very difficult for us to see activity. We’re working through how forward-thinking we can be in terms of that investment.

Why it matters: Profitable businesses become less attractive to head office when Asian currencies depreciate sharply against the US dollar or other home-market currencies.

One real estate investor described how this is impacting India:

The only people who are heavily invested in a meaningful way in real estate in India are people like [Singapore’s sovereign wealth fund] GIC, who, frankly, have a macro view on their exposure to India. So, by buying real estate, they don’t have to hedge their currency.

Everyone else must hedge their currency, which costs them so much money that it just erodes their return. We get to a point where I could show an investor something in Singapore at a 3.5% yield. I could show them better income and better asset quality in downtown Mumbai, priced at an 8% yield. But if the currency is depreciating at 9% a year, your whole return could be eroded.

Indonesia is creating a similar problem for other MNCs:

We have quite a good business in Indonesia, but the issue is that the currency is so low it does not bring much revenue for the company. Hedging the currency is very expensive, and some question whether it is even worth it. It is reassuring to hear that others are also facing a similar situation.

For real estate investors, currency risk is driving a reordering of entire portfolios.

The largest investors are pulling back from the smaller Southeast Asian markets and effectively doubling down on the larger, more liquid markets. The big sovereign wealth funds are selling in Indonesia and the Philippines. They are finding the currency fluctuations very difficult because the underlying real estate investment makes a 10% or 15% return—it almost gets wiped out by currency.

They’ve also found that liquidity in those markets gets pulled back very quickly. I see some investors making bigger bets on Korea, Australia and Singapore.

The upshot: For some Asia businesses, currency risk is no longer just a treasury issue. It is affecting where companies and investors are willing to put capital, and certain markets may be losing out.

Anticipating higher prices

What’s new: Asia CEOs and managers are preparing for inflation to worsen in the coming months as the shockwaves from the Gulf War continue to ripple through the economy.

Inflation is going to be elevated in the second half of this year. Pressures are coming through almost everywhere. It is clear in Singapore, the Philippines and Japan as well. Food inflation will continue as the fertiliser shortage bites. The question is whether consumers will start to delay decisions. I view this not just as a 2026 H2 story; it’s a 2027 H1 story too. The worst physical shortages have been avoided, such as with energy, but financial channels are going to be further strained.

Making predictions: Weather is another factor driving prices up. Cold weather in the Western Hemisphere could create more demand for oil and gas already in short supply.

In Europe and the US, gas stocks are very low. As they enter winter, gas prices will spike again as everyone needs to heat their homes. This will generate a second wave of inflation. Crops coming in September and October will likely have lower yields because of fertiliser scarcity, which will also drive prices higher. I anticipate more inflation this winter.

However, the El Niño effect is harder to prepare for. It could bring warmer temperatures to Europe or Asia this winter, or less welcome conditions such as heavy rains or drought.

This is an El Niño year. There are different views of what this could mean. One view is quite clear—there will be disruptions. Let’s say in some countries it could mean higher crop yields, while in others it could mean a complete wipeout of crops.

Climate disruptions are already affecting the prices of global commodities such as coffee, forcing higher prices onto consumers.

I agree inflation will be a major factor in the second half of this year. We are seeing hedge funds speculating on coffee bean crops. There have been shortages, and prices have risen massively, but some expect a bumper crop in Brazil, one of the biggest coffee producers. Like oil, beans are bought forward to secure supply.

In the consumer-packaged goods world, it’s tricky to secure volume growth. If prices go too high, consumers eventually trade down or exit the category. Coffee is less sensitive, but we see it elsewhere.

Yes, but: While consumers are unlikely to abandon coffee, many may delay more costly discretionary purchases, such as computers and electronics, where the sticker shock is more acute.

We are very affected by the computer memory supercycle. Demand has been extremely strong this year. Orders almost doubled last year, and in some cases tripled. I see a slowdown among consumers and SMEs that can no longer absorb the price increase. Computer systems that would go for $15,000 are now in the range of $60,000 to $100,000.

I am considering pulling back some investments in Southeast Asia and doubling down on countries like Australia, where they can handle the higher prices a bit more. I see risk in the margin profile for 2027. Memory prices are expected to only increase. On the commercial side, larger firms are still buying.

Businesses are facing not only rising hardware costs, but also rising software costs too.

A hot topic has been the cost of AI. Companies now realise that token costs can be astronomical, and many are pulling back on their AI use, even tech firms. The move is towards using LLMs mainly on edge devices or networked PC terminals, and not the cloud, to save costs. We use a lot of sensitive data, so our preference is to have everything on the edge, not the cloud, because there is always a security risk otherwise.

Higher electricity prices could add another layer of costs for the data centres underpinning AI and cloud computing—and challenge assumptions made when projects were first approved.

Half of the cost is the price of electricity, and the price of electricity is going to rise. So the business model they had when they decided to build the data centre is not at all what will happen. What happens when they have 10% or 15% more cost on electricity? At some point, I guess they will have some difficulty.

The upshot: Members are expecting inflationary pressure to extend well beyond the initial Gulf shock.

• Energy and fertiliser shortages are feeding into transportation, food and other input costs, while weather could amplify those pressures.
• At the same time, strong demand for AI infrastructure is pushing up the cost of memory, computing, and power.