Time to Position for 'Slowflation': Strategist

Ben Bernanke acknowledged on Tuesday that the U.S. economic recovery is fragile, but he didn't hint at any further monetary stimulus. One strategist says investors should be prepared for a period of 'slowflation': slow growth accompanied by high inflation.

NYSE trader
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NYSE trader

Citigroup’s Head of Asia Economics & Market Analysis, Johanna Chua told CNBC the situation is similar in many ways to the summer of 2010, when people were worried about a slowdown.

"We had this conversation in the middle of last year in the double dip scenario risk, that was a great time to buy bonds," said Chua.

According to her, investors are once again slowly going back into long-end bonds. But, she warned, investors who did so risked higher inflation and further rate hikes, both of which would hurt fixed income assets.

The inflation risks are especially elevated in Asia. Consumer prices in China, for example, are currently rising above 5 percent year-over-year.

Instead, Chua's ‘slowflation’ trade takes into account the double whammy from further monetary tightening and slowing growth.

She's betting that further rate hikes will become politically difficult for Asian central banks because of a global slowdown, and so some countries will allow their currencies to appreciate in order to fight inflation.

Chua recommends going long on the Indonesian Rupiah and Korea Won. She also recommends buying local currency bonds of Indonesia and Philippines, which she expects will appreciate because of inflows of foreign capital.

On the other hand, she's most worried about economies in Asia that are leveraged to global growth. For example, she expects a more pronounced second-quarter slowdown in Singapore, Hong Kong, Malaysia, Taiwan and Thailand.