The Five Countries Most Vulnerable to Tapering

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Dec. 19 (Bloomberg) –- Bob Rice, general managing partner with Tangent Capital Partners LLC, explains what he calls the fragile five; emerging market countries whose economies could be most affected by the Fed’s tapering. He speaks to Mark Crumpton on Bloomberg Television’s “Money Moves.” (Source: Bloomberg)

Improvement continues.

For how the taper impacts emerging markets, particularly the so-called fragile five, i am joined by bob rice, managing partner at tangent capital.

And we are not talking about the new york knicks.

We could be, but that is a different show.

Emerging-market indexes are mostly down today.

A lot of people are not tuned into how much the taper impacts the emerging markets.

We have a chart that will show you how much emerging markets have done over the course of the last several years.

For a while, they were doing fine but when we hit the last year, you will see they are down on average about 5%, depending on which when you're looking at.

Our markets are up 30%. one of the main reasons for that during the course of the last year has been the fear of tapering.

Over the summertime, there was a complete collapse in the emerging markets and now it's starting to become a reality.

Let's start by reviewing who the fragile five are and why they are vulnerable to tapering.

They are the most vulnerable.

Your we have a nice little map and we can get a geography lesson at the same time.

Brazil, turkey, south africa, india and indonesia are the so- called fragile five.

These are come -- these are countries that are available on -- that are dependent on large amount of foreign capital to keep their emerging markets emerging.

In particular, indonesia is a troubled spot right now.

That's largely because deutsche bank has estimated they will need about 9.4% of their gdp paid out in foreign currencies over the course of the next year.

That's almost exactly the amount they have in the reserves.

That implies they will have to attract more foreign capital fairly quickly.

Is that a problem?

It is because what is happening, and this is where the taper comes to bite them, as rates rise in the united states, investors go that looks like a safer place to put my money.

Now they're able to earn a return on the money, so instead of investing in indonesia, which i have been doing because i was stretching for yield, i will come back to the united states.

So indonesia's darling costs go way up great what is going to be tougher if the u.s. is competing for those investments?

For all of these countries, it's the same problem.

Our when costs go up at the same time they need the capital.

That will negatively impact their markets and economies.

Investors are looking at these countries with a very wary eye right now and all five of the fragile five have big elections coming up.

How are the politics going to change this dynamic?

Or are two ways and both ways are worse.

One of them is it's just change and investors are always afraid of change.

Elections are inherently bad and frankly, emerging markets, local politicians tend to turn on the money machine to facilitate voting.

So all the cronyism and inefficiencies of those markets tends to get exaggerated and make it a less friendly place for foreign investors to be.

Is there an upshot for foreign investors?

You want to save they are emerging and there is opportunity, but you want to be investing behind experts.

I would not want to be an etf in this kind of thing.

Active managers -- that is the place to be.

This that tapering in a nutshell, did it start some sort of domino effect?

Yes.

It did already.

The reality is a domino effect and as those rates keep going up in the united states, these emerging markets will have more

This text has been automatically generated. It may not be 100% accurate.

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