Playing Asia In The Face Of Rising Gas Prices

By Aaron Levitt | March 21, 2012 AAA

It's not just U.S. consumers that are being affected by the rise in oil prices. Asia, with its surging economic growth and rapid industrialization, is starting to feel the effects as well. Producing only about a third of what it consumes, these higher prices have the ability to spur inflation in the region and potentially hinder that expansion. That could be a problem, as the continent has been the main catalyst for global economic growth over the last few years. However, not all of Asia's dynamic nations will fare the same in the world of high energy prices. For investors, betting on the stronger ones might make sense.
Rising Price Inflation
Since early October, crude oil as measured by the Brent benchmark has risen about 42%. That's been problematic for Asian economies, as local energy production can't fuel rising demand. Excluding Japan, crude-oil imports for the region have risen from around $234 billion in 2009 to a record $447 billion last year. Analysts estimate that for every $10 rise in the price of a barrel of oil, Asia adds about $3.5 billion to its monthly import bill. Those higher costs have begun to trickle down to consumers, as well. Like the United States, consumers in the region are now faced with rising gasoline costs. For example, Singapore has seen prices for a liter of 92-octane gasoline rise 6% this year. That's equivalent to paying $6.48 a gallon.

The problem lies within rising inflation and its potential to hinder the region's economic growth. Already victims of their own success, curbing inflationary pressures have been a hallmark of various monetary policies on the continent. Yet, those policies have switched gears recently. As the region receives much of its economic activity from exports to Europe and the U.S., slowing growth caused by Europe's debt woes has promoted many officials to begin easing. However, higher oil prices have already made many Asian policymakers think twice about cutting lending rates and implementing other stimulus measures. If crude continues its march higher, it could force more central bankers to raise rates, sacrificing growth in order to quell inflation.

Analysts estimate that if various "worst case" scenarios play out, Brent crude will rise to $150 a barrel in the second quarter and average $135 for the entire year, Asia will only grow by 6.1%. Core inflation measures would rise from 4.5 to 5.2% or more, and seriously hamper the regions ability to spur future growth. That could potentially unhinge the fragile recoveries in the west.

Playing the Mixed Bag
For Asia, rising oil prices will be a mixed bag. While holding a broad Pan-Asia play like the SPDR S&P Emerging Asia Pacific (ARCA:GMF) still makes sense, investors may want to overweight those economies that are likely to succeed in the environment. Both Taiwan and Thailand are the biggest net crude importers relative to the size of their economies. In addition, analysts estimate India will have the most difficulty dealing with rising prices. Investors may want to avoid or even short the PowerShares India (ARCA:PIN), iShares MSCI Thailand (ARCA:THD) and iShares MSCI Taiwan (ARCA:EWT).

Those economies with spare capacity will be able to hold up better as higher oil prices won't trigger runaway inflation. Partnering with companies like Exxon (NYSE:XOM), Malaysia's state oil company, Petronas, has been able to tap the rich Sabah, Sarawak and Terengganu fields and become a major net exporter of oil. The iShares MSCI Malaysia (NYSE:EWM) is still the best way to access the nation.

Likewise, China has historically been able to absorb gasoline price increases and has quickly become a major energy producer. The Global X China Energy ETF (ARCA:CHIE) follows a basket of 28 different Chinese energy producers like CNOOC (NYSE:CEO) and Sinopec (NYSE:SHI). Overall, the fund has about 62% of its portfolio in the oil and gas sector and could be a great broad Asian energy play. Expenses run at 0.65%.

The Bottom Line
Rising oil prices aren't just problematic for consumers in the United States; those in Asia are feeling the pinch as well. That could spell problems for the global economy if inflation gets out of hand; however, various nations will weather the storm differently. For investors, betting on the economies that will be able to absorb higher prices could be the way to play the region.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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