The Fragile Five

February 07, 2014 | Tom Salemy, CFA, CAIA, Managing Director

Given the continued poor performance of emerging market (“EM”) investments, this week’s chart examines the structural issues challenging a number of EM countries, namely the “fragile five” (Brazil, India, South Africa, Turkey, and Indonesia). The chart illustrates how countries with high inflation and large current account deficits have seen their currencies decrease dramatically against the U.S. dollar. In comparison the currencies of Mexico and South Korea have remained relatively resilient.

As liquidity is gradually withdrawn from the global economy, these structural issues within emerging markets have come to the forefront. Investors are concerned that after years of expansion and unlimited access to cheap capital despite poor policy fundamentals, these EM countries will have a very difficult time implementing the necessary structural reforms, while also maintaining strong growth.

In response, central banks of all the fragile five countries have taken decisive action and increased their benchmark interest rates within the last four months. Furthermore, due to emerging markets’ continued weak performance, valuations are not only attractive for the asset class as a whole, but more importantly for stronger and more stable EM countries such as Mexico and South Korea. While there is still policy and political uncertainty affecting emerging markets, there is no doubt that value is present in the asset class.

*Currency return from January 1, 2013 to February 4, 2014.