Financial Times

Alert on emerging markets crisis and US slowdown despite Fed rate decision

by Stephen Foley ­ and James Kynge ­

September 22, 2015 | 3:48 am
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The world economy is locked on a course towards an emerging markets crisis and a renewed slowdown in the US, despite the Federal Reserve’s decision last week to hold off on a
rise in rates, according to one of 2015’s most successful hedge fund managers.

John Burbank, whose Passport Capital has placed a number of lucrative bets against commodities and emerging markets this year, forecast that the Fed would be forced into a fourth
round of quantitative easing to shore up the economy.

In an interview with the Financial Times, Mr Burbank said years of QE had caused a misallocation of capital across the world, while the end of QE last year triggered a dollar rally with
consequences that were only beginning to be realised.

“The wrong people got the capital ­ emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies ­ and this is now a
major problem for the credit markets,” he said.

Mr Burbank was speaking days after the Fed decided against raising US interest rates from near­zero levels, warning of “global economic and financial developments” and the damage
these could do to US growth and inflation.

One of the most worrying for economists is the declining fortunes of emerging markets, which have deteriorated sharply this year following a significant slowdown in the Chinese
economy, recessions in Russia and Brazil and widespread outflows of capital.

Developing world currencies have tumbled on average to their lowest levels since 2002.

Emerging market gross domestic product growth rates are set to fall to 3.6 per cent this year on average, their lowest level since the 2008­09 financial crisis, according to estimates
from Oxford Economics. Such signs of distress, coupled with a potential tightening in US monetary policy, have persuaded investors to flee developing world asset classes.

Mr Burbank said investors were not recognising the risks, and Passport was not pulling out of its bearish bets. “I think we are on the precipice of a liquidation in emerging markets, and
this feels the way that the fourth quarter of 1997 felt.”

Additional reporting by Joe Leahy in São Paulo

By Stephen Foley ­ and James Kynge ­ 

by Stephen Foley ­ and James Kynge ­

September 22, 2015 | 3:48 am
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