India among 'Fragile Five' facing funding risks as dollar strengthens

India is among five emerging market countries which could face significant funding risks as the dollar strengthens against their home currencies.

 

The others are Indonesia, Brazil, Turkey and South Africa, according to an Asia/Global Emerging Markets Strategy report from international brokerage  Morgan Stanley Asia Limited report.

 

The report dated September 4 noted that external funding remains crucial for many countries in the Asian and emerging market pack, and that a strengthening dollar can ‘ can create a significant challenge, which is already weighing on both earnings power and multiples.’

 

“We are seeing this play out in a pattern of currency weakness, rising domestic rates, banking sector pressures and equity multiple contraction in parts of EM. The risk is of a more general contagion impacting the whole asset class, as occurred in 1997/98 or 2008,” said the report authored by Jonathan F Garner, Pankaj Mataney, Yang Bai and Laura Wang.

 

Current equity positions could also have an impact for India.

 

“From an equities perspective, we would also note that two of the more vulnerable countries – Brazil and India – continued as of end of July to be over-weighted....This represents a source of likely continued downward pressure on these currencies in particular,” it added