A little more than a decade ago, Wall Street brought to the world an acronym that won’t soon be forgotten: BRIC — Brazil, Russia, India and China. These four countries were targeted as the best prospects for investment growth, thanks to their world-average beating economic growth.
And for the better part of the past decade, emerging-market growth has indeed been impressive, generating year-over-year GDP gains often in the double-digits. Meanwhile, U.S. GDP growth has generally stayed below 3%.
Yet, economic growth is only part of the equation.
As it turns out, foreign direct investment has been another key factor in propping up certain emerging markets. And now that the Fed is tapering, speculation is mounting that foreign direct investment will drop sharply, reversing the good fortunes enjoyed by the BRIC nations since the turn of the 21st century.
Already, a new catch-phrase has surfaced. That is the “Fragile Five” — comprising Turkey, Brazil, India, South Africa, and Indonesia. These countries are identified as being most susceptible to the crushing effect that would result from a decline in foreign investment.
As you can see, Wall Street has been quick to turn on Brazil and India, once exulted BRICs and now part of the Fragile Five.
Here’s a chart showing year-over-year returns of various currencies (relative to the U.S. dollar):
As you can see, of the BRICs-turned-Fragile-Five… Brazil and India are suffering with the worst returns of the bunch. And South Africa, Indonesia and Turkey have seen their currencies lose an average of 20% of their value.
Investor confidence is clearly at play here, as emerging-market currency sell-offs have only spurred further sell-offs in a negative feedback loop that shows no sign of ending any time soon. In fact, this may be just the beginning of a theme that could play out all year.
Naturally, the U.S. dollar will move higher as long as investors fear the worst from the Fragile Five. We’ve been harping on our bullish dollar view for years now. But if you’ve missed it, now is the time to join us in finding safety and strong returns in the U.S. dollar.