After India and Indonesia enacted reforms to bolster their economies, emerging market exchange traded fund investors will only have to monitor the remaining fragile three if the Federal Reserve decides to tighten its monetary policy.
Morgan Stanley first identified the Brazil, India, Indonesia, Turkey and South Africa as the five most vulnerable to changes in Fed policies back in August 2013, but now India and Indonesia have enacted enough economic reforms to have passed “the point of inflexion away from their old models of growth,” reports Simon Kennedy for Bloomberg.
India has been one of the better performers over the past year, with the WisdomTree India Earnings Fund (NYSEArca: EPI) up 32.1%, iShares India 50 ETF (NasdaqGM: INDY) 31.2% higher and PowerShares India Portfolio (NYSEArca: PIN) up 30.3%. [Capture Overseas Opportunities with These ETFs]
Additionally, the iShares MSCI Indonesia ETF (NYSEArca: EIDO) and Market Vectors Indonesia Index ETF (NYSEArca: IDX) have increased about 7% over the past three months after President Joko Widodo cut gasoline subsidies and diminished the budget deficit.
Morgan Stanley estimates that India has enacted 85% of necessary reforms while Indonesia has completed 65%.
However, Morgan Stanley believes Turkey has only added no more than 10% of the recommended reforms, Brazil enacted 15% and South Africa has not changed a thing. Consequently, these three countries have experienced current-account shortfalls and high inflation. Additionally, other internal risks, such as widening corruption in Brazil and political pressure on Turkey’s central bank, have added to volatility.
Over the past year, iShares MSCI South Africa ETF (NYSEArca: EZA) was up 2.9%, iShares MSCI Turkey ETF (NYSEArca: TUR) was 5.0% higher and iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) plunged 22.1%. [Brazilian Bungle: More New Lows for Brazil ETFs]
With the prospect of the U.S. Fed thinking about a rate hike, these less stable countries could face even greater pressures in the mid-term. [Strong USD Forces Down Emerging Market ETFs]
“The next 12-18 months may make things sufficiently worse so they can then get better,” Morgan Stanley analysts said.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.