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India club’s new name: Fragile Five

Jan. 29: 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 programme. 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 realised this week when Turkey, seen by most investors as the most fragile of the Fragile Five, raised interest rates 4.25 percentage points yesterday.

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.

“I still believe these are the best investment opportunities in the world,” said O’Neill, who acknowledges being irritated at having to defend his thesis every time there is an emerging market wobble.

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 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, the trade group for international banks.

 
 
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