May 2 (Bloomberg) -- JPMorgan Chase & Co. cut stock index targets for China, India, Hong Kong, the Philippines and other markets in Asia as higher inflation prompts tightening of monetary policy.

The Hang Seng China Enterprises Index target was trimmed 16 percent to 18,500, India's Sensitive Index by 18 percent to 22,500, the Hang Seng Index by 10 percent to 35,000, and the Philippine Stock Exchange Index by 28 percent to 3,400, JPMorgan strategists including Adrian Mowat wrote in a report dated May 1.

``Investors' focus needs to move to increasing policy risk as governments manage a poorer growth-inflation balance,'' the report said. ``The downside risk is that higher inflation reduces domestic demand and investment, as disposable income and profit margins are squeezed.''

Among Asian markets outside Japan, indexes apart from Australia, India, South Korea and Pakistan are still forecast to generate a total U.S. dollar return exceeding 20 percent, said JPMorgan, the third-largest U.S. bank. The ``upside risk'' is that lower U.S. interest rates combined with a flight of capital from U.S. credit markets may boost Asian equity valuations.

Global inflation, at 4.1 percent, reached a nine-year high in the first quarter of 2008. Inflation in emerging economies is 3 percentage points above the average target ceiling, forcing central banks to move more decisively, the report said.

``It is this deterioration in the price-stability-growth balance that is driving the downward revisions in index targets,'' the note said. ``Simply the increased policy risk needs to be reflected in lower valuations.''

External Risks

Slowing demand from countries included in the Organization of Economic Cooperation and Development have so far failed to cause an emerging market slowdown ``as was popularly feared,'' JPMorgan said. ``The combination of robust domestic demand and high headline inflation should generate an aggressive tightening response.''

JPMorgan expects 10 emerging market central banks to tighten monetary conditions, including five in Asia.

Three other index targets were cut in Asia: South Korea's Kospi by 14 percent to 1,970, Indonesia's Jakarta Composite Index by 12 percent to 2,800 and Malaysia's Kuala Lumpur Composite Index by 7 percent to 1,500. On Feb. 23, JPMorgan cut the target for Singapore's Straits Times Index, by 21 percent to 3,800, and on March 28 the target for Australia's S&P/ASX 200 Index was pared by 16 percent to 5,900.

Two index targets were raised: Taiwan's Taiex by 5 percent to 11,000 and Pakistan's Karachi Stock Exchange Index by 3 percent to 16,500. Thailand's SET Index target was left unchanged at 970.

To contact the reporter on this story: Elaine Chan in Hong Kong echan58@bloomberg.net.

Last Updated: May 2, 2008 05:17 EDT