[The Morgan Stanley report came
out in August, when there were reports that the Federal Reserve would soon reduce
its bond-buying program. The term that report coined became a quick and easy
way for investors to give voice to fears of a broader emerging markets rout,
propelled by runs on the Turkish lira, Brazilian real and South African rand.]
By Landon Thomas
 |
Winnowing crops in |
The long-running boom in emerging markets came to be identified, if
not propped up, by wide acceptance of the term BRICs, shorthand for the
fast-growing countries Brazil ,
Russia , India
and China .
Recent turmoil in these and similar markets has produced a rival expression:
the Fragile Five.
The new name, as coined by a
little-known research analyst at Morgan Stanley last summer, identifies Turkey ,
Brazil , India ,
South Africa and
Indonesia as
economies that have become too dependent on skittish foreign investment to
finance their growth ambitions.
The term has caught on in large
degree because it highlights the strains that occur when countries place too
much emphasis on stoking fast rates of economic growth. The new catchphrase
also raises pressing questions about not just the BRICs but about emerging
markets in general.
The Morgan Stanley report came
out in August, when there were reports that the Federal Reserve would soon reduce
its bond-buying program. The term that report coined became a quick and easy
way for investors to give voice to fears of a broader emerging markets rout,
propelled by runs on the Turkish lira, Brazilian real and South African rand.
These fears were realized this
week when Turkey ,
seen by most investors as the most fragile of the Fragile Five, raised interest
rates 4.25 percentage points on Tuesday.
The sharper-than-expected
increase by the country’s central bank — which previously took a fairly passive
approach to defending its currency — was intended to persuade foreign
investors, as well as corporate and household savers, to hold on to their lira
instead of exchanging them for dollars.
As with other members of the
Fragile Five, Turkey
relies heavily on fickle short-term investment from foreigners to finance
gaping current account deficits — the result of which has been a currency that
many investors say is overvalued.
Investment analysts love to come
up with catchy names that simplify their views and, ideally, capture the market
spirit of the moment. During the early period of the euro crisis, PIGS,
unkindly, came to describe Portugal ,
Ireland , Greece
and Spain . And
when the focus turned to Greece
and its future in the euro zone, Grexit became the term of art.
Not all of them catch on. In
September, Deutsche Bank analysts came up with Biits, which covers the same
countries as the Fragile Five, but it graced hardly any analysts’ reports.
The countries in the Asian
financial crisis of 1997 never got saddled with a nickname. As in that and
other emerging market blowups, foreign investors and lenders pulled their money
out because of broader concerns about political and economic uncertainty.
And while there have been sharp
outflows from Turkey and some of the other members of the Fragile Five, broadly
speaking, foreign investors have retreated from the asset class as a whole.
None of which surprises Jim
O’Neill, who, as an economist at Goldman Sachs in late 2001, came up with the
phrase BRICs as a way to highlight the long-term growth potential of large
emerging market economies.
Launch media viewerA miner in Indonesia .
Mercury is used to process ore from small-scale mines, which carries risks to
the miners and the environment. Yusuf Ahmad/Reuters
“I still believe these are the
best investment opportunities in the world,” said Mr. O’Neill, who acknowledges
being irritated at having to defend his thesis every time there is an emerging
market wobble.
Mr. O’Neill, who recently left
Goldman and now works independently, has just come up with yet another,
similarly dynamic club. This one, of populous countries with high growth
potential, he calls MINTs, for Mexico ,
Indonesia , Nigeria
and Turkey .
When Mr. O’Neill coined the BRICs
phrase, foreign capital inflows into emerging markets were about $190 billion a
year, according to data from the Institute
of International Finance
His timing could not have been
better: The Federal Reserve was moving to a policy of very low interest rates
and China ’s
growth engine was revving up, driving what would become a long-running
commodity boom.
Yield-starved investors began
pouring into Mr. O’Neill’s markets and their economies. Since 2010, annual net
inflows into these markets have averaged a little over $1 trillion a year.
As a result, Mr. O’Neill became
quite the global man about town. He has been celebrated by investors and the
BRIC nations themselves, which even formed a BRIC-development bank.
All this changed last summer,
when the Fed’s announcement that it would eventually reverse its bond-buying
program panicked giddy emerging-market investors. Other concerns, like a
slowdown of growth in China ,
political uncertainty in Russia
and Turkey and
most crucially, vulnerable currencies in Brazil
and South Africa ,
spurred concerns over the possibility of a broader market panic.
So in early August, when James K.
Lord, a fairly junior currency analyst at Morgan Stanley sent out a research
note warning of the risks within the “fragile five,” the name spread quickly,
especially among investors already nervous about their emerging-market
holdings.
Although Mr. O’Neill, while at
Goldman, aggressively marketed his BRICs notion, Mr. Lord and his team at
Morgan Stanley have been more circumspect, avoiding for the most part public
statements in the news media.
In response to questions about
his Fragile Five thesis, Mr. Lord, who this year was promoted from vice
president to a more senior position, asked that he be quoted playing down his
original thesis.
“We have been using the term less
and less in our research,” he said, explaining that responses by policy makers
in these countries have to some extent addressed the issues he raised.
That is not surprising. Banks are
always wary of promoting critical investment calls, especially when important,
fee-generating nations like Brazil
and Turkey are
concerned.
But more skeptical investors
remain less inclined to view currency-stabilizing steps taken by Turkey
and other Fragile Five members in such a sanguine light.
“People made mistakes investing
in these markets just because of the headline G.D.P. and demographics,” said
Stephen L. Jen, a former economist for the International Monetary Fund who now
manages a hedge fund based in London .
Important issues like corruption and governance, not to mention excessive
lending in urban areas that favored the political and economic elites, have
been ignored, he pointed out.
“Istanbul
does not need 100 malls,” he said. “There is a reason these people are poor.”
Mr. Jen did make a stab at
crafting his own catchphrase and considered adding Russia
to transform the Fragile Five into the Sorry Six, before ditching the notion.
Better to keep it simple, he
said, and steer clear of currencies with four letters: the Mexican peso, the South
African rand, the Brazilian real and, of course, the Turkish lira.
