PIMCO portfolio managers identity two 'Fragile Five' economies whose fortunes have flipped
A decade ago, there were several emerging markets considered part of the ‘Fragile Five’ economies due to their reliance on foreign investment to finance growth and their vulnerability to external shocks.
The phrase was coined by a research analyst at Goldman Sachs in 2013 and was criticized for over-simplifying the economic complexities of the five countries, which included Brazil, India, Indonesia, South Africa, and Turkey.
But in 2023, two of the five are on the verge of becoming EM superstars despite the global economic environment according to two Asia portfolio managers.
PIMCO’s Subhash Ganga and Stephen Chang believe that India and Indonesia are rising secular stars with the OECD forecasting that India’s growth (6%) will outpace that of China (5.4%) this year with Indonesia nipping at its heels in third place (4.6%). All three are way ahead of expected global growth of 2.7%.
India and Indonesia have a combined population of 1.7 billion and have a younger skew compared to the aging population of China and developed nations with 68% of both populations currently aged 15-64 years and only 7% above 65. The median age is expected to remain below 40 years until 2057 in Indonesia and 2070 in India, compared to 2027 for China. India will have 1 billion people of working age by 2030.
India and Indonesia have also done well at navigating inflation and fiscal financing.
Elsewhere in the Asia region, Taiwan and South Korea are both growing thanks to the AI boom.
Investor implications
“Against this backdrop, we see scope for currency appreciation and growth outperformance, along with increased capital inflows,” the PIMCO PMs wrote in a company article.
The countries are also investing heavily in boosting their infrastructure, reforming policies to promote better living and business environments, playing an increasingly important role in global supply chains, pushing green energy and commodities, and focusing on digitalization.
With stable sovereign credit ratings expected, there is also the potential for upgrades.
“However, due to taxes and tight valuations, we do not find duration and credit to be attractive in either country,” the PMs opined.
India and Indonesia both have elections in 2024 which adds some risk for investors, although the PIMCO experts do not expect any major policy changes.
