Fragile Five Now Fragile Four?

March 19, 2015 | David Hernandez, CFA, Director of Traditional Manager Search

In 2013, Brazil, India, Indonesia, South Africa, and Turkey were dubbed the “Fragile Five” due largely to high current account deficits and dependence on foreign capital flows. During the “Taper Tantrum,” these currencies were hardest hit recording double-digit losses. This week’s chart provides an update on current account balances for each respective country.

While the “Fragile Five” have been famously linked together, India has taken steps to distance itself from the group, improving its current account deficit from -5.1% in March 2013 to -1.3% in September of 2014. In addition, markets have praised the election of Narendra Modi as Prime Minister, given his focus on business confidence, economic growth, and structural reform. In sharp contrast, Brazil’s current account balance has declined and its political turmoil has heightened.

With the U.S. preparing to raise rates, emerging market participants are concerned about the possibility of a “Taper Tantrum” repeat. Relative to 2013, India is in a better position to handle such an environment. India’s contrasts with Brazil exemplify a growing trend of divergence within emerging markets, one that investors should expect to continue. Another tantrum will negatively impact the entire asset class, but some countries are better positioned to navigate the turbulence.