The Fragile Five is a term coined by a Morgan Stanley financial analyst in 2013 to represent emerging market economies that are too dependent on unreliable foreign investment to finance their growth ambitions.
Learn more about the Fragile Five, who they are, and their impact on investors.
What Are the Fragile Five?
The Fragile Five consists of countries that rely too heavily on foreign investments for growth. Since the phrase was coined, other financial firms such as ratings agency S&P Global have issued different rankings, while the World Economic Forum compiles a list of its own based on criteria that involve world peace.
When the term was first established, the original Fragile Five countries included Brazil, India, Indonesia, South Africa, and Turkey. In an updated list issued in December 2016, Morgan Stanley named Colombia, Indonesia, Mexico, South Africa, and Turkey. In November 2017, credit rating agency S&P Global picked as its Fragile Five a different set of nations—Turkey, Argentina, Pakistan, Egypt, and Qatar—because of how negatively these countries were affected by rising interest rates.
The World Economic Forum chose Congo (Democratic Republic), Syria, South Sudan, Somalia, and Yemen as its Fragile Five, but ranked Venezuela and Brazil as the countries most in decline because of political corruption and reduced services.
How the Fragile Five Works
Morgan Stanley selected its first Fragile Five in 2013 in response to the global economic recovery. They score emerging markets on six factors:
- Current account balance
- FX reserves to external debt ratio
- Foreign holdings of government bonds
- U.S. dollar debt
- Real rate differential
As developed markets like the U.S. were recovering from the 2008 financial crisis, investors began moving money out of the emerging markets and back into the U.S. dollar. These sharp outflows came mainly from Brazil, India, Indonesia, South Africa, and Turkey. Their currencies—the Brazilian real, Indian rupee, Indonesian rupiah, South African rand, and Turkish lira—experienced significant weakness and made it difficult to finance their account deficits.
The lack of new investment also made it impossible to finance many growth projects, which contributed to a slowdown and added vulnerability in their respective economies. In 2015, most of these markets experienced ongoing declines. They continued to rely on foreign investment to replenish their current account deficits.
However, India experienced a more stable currency, falling inflation, and a controlled fiscal deficit, making it a much better investment destination and dropped off the list in 2017. India's stocks and currencies outperformed the largest economies for at least half of that year.
The future of the Fragile Five rests heavily on the stability of the U.S. economy. Should the dollar weaken, their fortunes could improve.
As U.S. trade and tariff policies that began in 2018 continue to change, the Fragile Five may continue to change. The tariffs put some countries on Morgan Stanley's original list, particularly Indonesia, into a better position. While India was already improving as an economic power because of political changes and is unlikely to return to Fragile Five status, Indonesia is now in a position to become a safe haven for investors during the trade war escalation.
Alternative to the Fragile Five
If you want to add international investments to your portfolio but worried about the risk, instead of investing in individual companies in Fragile Five countries—making yourself more susceptible—you can invest in an international exchange-traded fund (ETF). International ETFs will spread your money across companies in foreign markets around the world. You can find an ETF that avoids including companies from the Fragile Five countries.
There are even country-specific ETFs. For example, if you decide you only want to invest in Chinese companies, you could invest in a China ETF. This is a way of ensuring you have more control over which foreign countries you invest in.
- Morgan Stanley coined the term Fragile Five in 2013 to describe emerging economies that relied too heavily on foreign investment for growth.
- Brazil, India, Indonesia, South Africa, and Turkey were the original Fragile Five.
- The Fragile Five relies heavily on the U.S. economic stability for survival.
- The World Economic Forum compiles a Fragile Five list that takes into account world peace into its rankings.