Asian economies brace for a "bleak time" in the next 18 months as runaway inflation erodes corporate earnings, Aberdeen Asset Management Asia said.

"The majority of companies are facing rising costs: rising property costs, rising wage costs, rising raw material or energy costs," said Aberdeen's Hugh Young.

"Margins are facing quite a squeeze this year,"Young said. Economies across the region are under threat as spiralling food and energy bills sap household and business budgets, and stoke inflation. China last week joined India, Malaysia, Indonesia and Pakistan in increasing fuel prices and reducing subsidies, touching $139.89 a barrel on June 16.

"Our fear is this year you'll be seeing more and more of the term that we started to use at the beginning of the year, which is 'stagflation'," Young told reporters in Hong Kong. "We're going to go through a period of far slower growth in Asia with a combination of far higher inflation."

Aberdeen forecasts "a tough year" for earnings growth in Asia, which will decline to about 7 percent to 8 percent, compared with an average of about 14 percent in the past five to six years, Young said.

"Earnings will come down as the year progresses, rather than go up," he said. Inflation "is one of the major reasons that we're fairly cautious in our earnings estimates."

China Mobile and PetroChina have fallen out of Aberdeen's top 10 regional holdings, said Young.

China Mobile's 105 percent jump in 2007 made it the fifth-biggest percentage gainer on Hong Kong's benchmark Hang Seng Index. The world's largest mobile-phone operator in terms of users, has retreated 22 percent this year. PetroChina, the nation's largest oil producer, has lost 26 percent this year.

"We were progressively top-slicing them," Young said. "Now, looking back, we are rather comfortable that we did take money out of China as prices soared."

The MSCI China Index has slumped 26 percent this year on concerns that the government will step up measures to curb consumer prices.

The nation's inflation climbed to 8.1 percent in the first five months of 2008 from 4.8 percent for in 2007.

To counter rising prices, the central bank has required lenders to set aside a record amount of money for reserves this year after raising interest rates six times in 2007.

Some companies stand to benefit, such as Rio Tinto Group, the world's second-biggest iron-ore exporter. Rio is the "purest beneficiary" from rising inflation, he added.

Bloomberg

(HK Edition 06/25/2008 page3)