Emerging markets should avoid stimulus plans

Mr Flanagan, manager of the $38m (£24.2m) Liontrust Emerging Markets Absolute Return fund, said if data from the US and leading emerging markets such as Brazil began to miss expectations, governments may start to panic and force stimulus measures on their economies.

The manager warned that the Brazilian government should not attempt to increase investment by intervening in the state-controlled energy and mining companies Vale or Petrobras, as this could “eat up” cash flow at the expense of investors. Raising taxes to fund growth investment, as some developing economies have done in the past, could adversely affect resources or banking companies that drive emerging markets, he added.

Brazil’s government is among several to have put pressure on central banks to pump in more liquidity or lower interest rates to boost growth, which Mr Flanagan said was “concerning” given the collapse in Turkey’s equity market during 2011 when a rapid cut in interest rates was followed by a spike in inflation.

Brazil has cut interest rates five times since August, from 12.5 per cent to 9.75 per cent, while inflation has fallen from its October peak of 7.3 per cent to 6.2 per cent in February.

“Markets are likely to respond positively to an improved growth outlook [and] a rise in equity markets and risk appetite will, of course, stimulate further investment and trade expansion, providing a feedback boost to growth,” Mr Flanagan said

Mr Flanagan’s Emerging Markets Absolute Return fund has lost 6.4 per cent since its launch in April 2009, compared with an MSCI Emerging Markets gain of 62.5 per cent.