Liontrust’s Flanagan issues EM warning
Head of emerging markets warns decline in developing world activity may be more serious than eurozone crisis.
Rapidly slowing activity in the developing world may be more dangerous to investors’ prospects than the eurozone debt crisis, according to Liontrust’s head of emerging markets (EM).
Eoghan Flanagan, who runs the $18m (£11.5m) Liontrust Emerging Markets Absolute Return fund, said industrial production in some emerging economies has been declining year on year, in some cases towards rates that indicate an “outright recession”.
His warning came just before India last week announced its year-on-year economic growth had hit a nine-year low in the first quarter of 2012, with a rate of 5.3 per cent compared with 9.2 per cent 12 months previously. Last year growth in Brazil also cooled dramatically, while there is a similar slowdown underway in China.
In China, Mr Flanagan said consumption of electricity and the volume of rail freight had slowed to annual growth rates of 1.5 per cent and 3.3 per cent respectively, compared with overall production growth of 9.3 per cent year on year.
“Taken together, these indicators suggest a broad-based decline in manufacturing activity across the emerging market universe that risks deepening into outright recession,” he said.
The manager added these figures have already hit annual forecasts for economic growth in the second quarter in developing countries such as Brazil, China and India.
According to Liontrust’s forecasts, India’s economy could grow by less than 4 per cent in 2012 compared with 8.5 per cent in 2011, while Brazil “may struggle” to hit 3 per cent growth this year. Brazil’s economy grew only 2.7 per cent in 2011 compared with 7.5 per cent in 2010.
China could grow by “less than 5 per cent”, Mr Flanagan said, regardless of the official government forecast, which predicts the country’s economy will grow 7.5 per cent this year.
“Emerging market economies that experience declining exports due to loss of competitiveness or demand factors become rapidly dependent on foreign capital to sustain consumption,” he said.
“This makes them extremely vulnerable to any confidence shock or cessation in global capital flows. This dynamic has been a key factor in economic crises from the Asian crisis in 1997 and the Russian crisis in 1998 onwards.”