As U.S. equities tread water, investors are reassessing their view on India, Turkey, Indonesia, South Africa, Brazil - economies labeled the Fragile Five for their dependence on foreign investment to fund large current account deficits.
As such, these markets have been viewed as the most vulnerable to U.S. Federal Reserve tapering and the wind-back of 'easy money'. But after stumbling in 2013 and early 2014, Turkey, India and Indonesia have rallied for the year to date while South Africa and Brazilian equities have still outstripped the S&P 500. A landslide win to a new, pro-reform government in India has also fuelled hopes of similar outcomes in other emerging markets. Still, there is little consensus on which of the Fragile Five has the brightest outlook.
"A lot of people had written off emerging markets due to bad policy but the scale of the mandate in India was a wake-up call," Federated Investors head of international equities Audrey Kaplan said in a phone interview. "Short-term, Fed tapering and concerns around Chinese growth will weigh on emerging markets for 3-6 months but longer term they will benefit from better global growth."
Both Kaplan and TIAA-CREF's Alex Muromcew like India's longer-term prospects, citing a narrowing current account deficit as exports rise on a weaker currency and strong support for the government's pro-reform agenda. But India's equity market rally of 31% this year and its higher valuation makes them cautious in the short-run.