Here come the Fragile 5: Brazil, India, Indonesia, Turkey and South Africa. At the heart of the ongoing crisis, they present some macro imbalances that distinguish them from the Fantastic four: Mexico, Poland, Czech Republic and Thailand.
The charts below show the extent of the imbalances between those two groups:
- Relative current account trends (external borrowing requirements) have diverged significantly in the aftermath of the financial crisis (or following the implementation of QE in the US… pick your own poison).
- Inflation: Not only do many of the Fragile-5 countries suffer from above-target inflation, but the average inflation figure was and still is well above that of the Fantastic-4.
- GDP growth for the Fragile-5 was clearly above that of the Fantastic-4 for during the last few years - that is, when the imbalances were formed.
- Those imbalances were the result of excess credit growth, among other things.
This should be a good case for a basket long Fantastic-4 / short Fragile-5. However, it's a little more complicated than that. The chart below highlights several things:
- The Fantastic-4 have been fantastic losers almost every time over the last 8 years;
- The link between global risk appetite/aversion and the relative performance of Fantastic-4/Fragile-5 is, at best, very loose; and
- The recent changes in VIX and (UST yields - see below) have not benefited the Fantastic-4…
Bottom Line: this short analysis confirms what I wrote in a previous post (Thttps://seekingalpha.com/article/1982221-emerging-markets-dont-try-to-discriminate), EM crisis are no time for discrimination. Fundamentals may play a role in the medium run, but betting on them, even on a relative value basis, when prices are going down, is useless. Stay short EM stocks across the board. It might even be too early to buy on dips.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.