Morgan Stanley's Fragile-Five days long gone as money starts piling into India

India and Indonesia once famously lumped together as part of Morgan Stanley’s “Fragile Five” are now investor favorites.

The outlook for the bonds and currencies of the two countries, according to a Bloomberg report, has brightened following a slew of reforms and fiscal restraint. 

The original Fragile Five — which also included Turkey, South Africa and Brazil — referred to nations perceived to be most at risk due to their heavy reliance on foreign investment to drive growth. 

Improving finances — as reflected in credit-default swaps — show the market’s view of India and Indonesia has swung almost 180 degrees since the term was coined in 2013. 

“Both India and Indonesia have strong near- and long-term fundamentals,” Kitty Yang, tactical asset allocation analyst for multi asset at Fidelity International in London was quoted in a Bloomberg report. 

“Growth is underpinned by positive (and continuing) reforms over the past 10 years under Prime Minister Modi and President Jokowi.”

India’s bonds have rallied over the past four months on the prospect of global index inclusion, and they extended gains in February after the government surprised the markets by announcing lower-than-estimated debt sales.

The government also said it planned to cut its budget deficit to 5.1% of gross domestic product.

“India is long overdue for a credit rating upgrade” as reforms have improved its fundamentals and resilience, thus creating some of the best opportunities in equity and fixed-income markets, said Kenneth Akintewe, head of Asian sovereign debt at abrdn Asia in Singapore. 

Prime Minister Narendra Modi, who is standing for re-election in May, referenced the Fragile Five in a speech to parliament this month. During the previous government, “the entire world used words like ‘Fragile Five’ and policy paralysis for India. And in our 10 years - among the Top 5 economies. That is how the world talks about us today,” he said.

The expression “Fragile Five” was coined by Morgan Stanley’s James Lord about a decade ago, identifying the countries as vulnerable economies.