The Fragile Five is a group of countries that rely heavily on foreign investments for growth. The group that makes up the Fragile Five has shifted over time, but they all have certain traits in common.
If you invest in international markets, the health of countries in the Fragile Five, and the status of the list itself, can offer insight into the global market. Learn more about the Fragile Five, who they are, and their impact on investors.
- Brazil, India, Indonesia, South Africa, and Turkey were the first countries to be called the Fragile Five.
- One feature of the Fragile Five is that in order to survive, the group relies a great deal on a stable U.S. economy.
- The World Economic Forum compiles a Fragile Five list that takes into account world peace when ranking countries.
What Is the Fragile Five?
The "Fragile Five" is a relatively new term in the global market. It was coined in 2013 by a financial analyst at Morgan Stanley to refer to a group of emerging market economies that depend a great deal on foreign investment to finance their growth. Since the phrase was coined, many other financial firms, such as ratings agency S&P Global, have issued their own rankings. The World Economic Forum also compiles a list of its own based on standards that involve world peace.
When the term was first created, the original Fragile Five countries included Brazil, India, Indonesia, South Africa, and Turkey. In a newer list issued in 2016, Morgan Stanley named Colombia, Indonesia, Mexico, South Africa, and Turkey. In 2017, credit rating agency S&P Global picked as its Fragile Five a different set of nations: Turkey, Argentina, Pakistan, Egypt, and Qatar. This latter group was chosen because of how these countries were negatively affected by rising interest rates.
The World Economic Forum chose Congo (Democratic Republic), Syria, South Sudan, Somalia, and Yemen as its Fragile Five. They also ranked Venezuela and Brazil as the countries most in decline on account of political corruption and reduced services.
Emerging market economies are found in developing countries that are in a phase of rapid growth. They tend to share common traits, such as: low labor costs, a growing middle class, new access to global trade, as well as shaky currency and a shifting political base.
How the Fragile Five Are Chosen
When Morgan Stanley selected its first Fragile Five in 2013, it was in response to the global economic recovery. The firm scored emerging markets on these six factors:
- Current account balance
- The ratio of foreign exchange reserves to external debt
- Foreign holdings of government bonds
- U.S. dollar debt
- Real rate differential
The History of the Fragile Five
The 2008 financial crisis took a toll on countries worldwide. As some of the more developed markets (such as the U.S.) were building back up after the 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. The currencies of these nations began to suffer from the draw. The Brazilian real, Indian rupee, Indonesian rupiah, South African rand, and Turkish lira, all began to weaken. This in turn made it hard for these nations to finance their account deficits and pay off foreign debt.
The lack of new investment also made it impossible to finance many growth projects. This lack fed into a slowdown, and made their economies more vulnerable. In 2015, most of these markets suffered ongoing declines. Even more than before, they relied on foreign investment to fulfill their current account deficits. It was like a cycle of debt.
How Countries Have Broken Free From the Fragile Five
India stood out from the other Fragile Five countries in 2015, in that it had a more stable currency, falling rate of inflation, and a fiscal deficit that was under control. All of these factors made it a much better place to invest in. As a result, in 2017 India dropped off the list. For at least half of that year, India's stocks and currencies performed better than even the world's largest economies. Due to changes in its political structure, India is still on the rise as an economic power, and is not likely to return to Fragile Five status.
The future of the Fragile Five rests heavily on the stability of the U.S. economy. Should the U.S. dollar weaken, their fortunes could improve.
In 2018, rules around U.S. trade and tariffs began to change. The countries that make up the Fragile Five may continue to adjust as a result. The tariffs put some of the countries that were on Morgan Stanley's first list into a better stance. Indonesia, for instance, favored well from this change. Indonesia is now in a position to become a safe haven place to invest during the trade war escalation.
How to Use the Fragile Five When You Invest
If you have been thinking about adding international assets to your portfolio but are worried about the risk, knowledge of the Fragile Five can help. Putting your money into assets that reside in Fragile Five countries carries great risk. If your tolerance for risk is sounding the alarm, you can instead invest in an international exchange-traded fund (ETF). These types of ETFs will spread your money across companies in foreign markets around the world. You can find an ETF that excludes 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 to make sure you have more control over which foreign countries you invest in.