Once Exulted, Now Fragile

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.

Investors often “vote” for or against an entire country’s economy by buying or selling its currency. And recently, investors have been casting a lot of votes against emerging market countries.

Here’s a chart showing year-over-year returns of various currencies (relative to the U.S. dollar):

See larger image

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.

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Categories: Foreign Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.