Growth in emerging markets stalling

It was a measure of the pace of growth in China that markets were troubled when it ‘only’ posted GDP growth of 10.3% for the three months to the end of June.

This was down from 11.9% in the first quarter, but well above the government’s 8% target. The slowdown was a reflection of the fading stimulus as last year’s surge in government-sponsored bank lending abated. The International Monetary Fund (IMF) raised its growth forecasts to 10.5% for the full year 2010 and 9.6% for 2011.

However, there were a few more worrying signs. Industrial production rose just 13.7% in June against expectations of 15.4%. CPI inflation came in lower than expected at 2.9% for June from 3.1% for May, both of which suggested a – welcome or otherwise – slowdown in the pace of growth.

India was forced to hike interest rates 0.25% to 5.5% as inflation hit 10.2%. Food price inflation continued to be particularly troublesome. The IMF dropped its 2010 forecast for the country, down 0.6% to 9.4%. Industrial output growth slowed to 7.17% in June from 11.3% in May, raising the question as to whether Indian companies were spending, or simply shoring up their businesses.

In Brazil, finance minister Guido Mantega said the country would grow 0.5% to 1% in the second quarter of 2010. He added that this was a slowdown from the first quarter but represented a more sustainable level of growth without risking inflation.

Russia was one of the few countries to see an acceleration in growth in the second quarter, with GDP rising at an annualised 5.2%. This was partly a reflection of the rising oil price – up from $74.65 (£47.87) to $77.42 a barrel over the month. However, growth forecasts were hit by a destructive heatwave and estimates suggest as much as 1% may be shaved off growth as agricultural output was hit.

It was a strong month for emerging economy equities, with all markets except India enjoying double-digit returns. India’s S&P CNX 500 index could only manage an anaemic 1.9% as investors fretted about its growth prospects and inflationary pressures. However, the FTSE Xinhua index was up 11.4%, the Russian RTS index was up 10.5% and Brazil’s Bovespa index was up 10.8%.

Emerging markets funds remain among the best performers over the year to date. The average fund is up 4.5% since the start of the year with the best-performing fund up 13.4%. More defensively positioned funds have suffered, however, and the worst-performing fund is down 4.4%.