Photographer: Kostas Tsironis/Bloomberg

Goldman Says the ‘Fragile Five’ Catchphrase Is a Misnomer

Updated on
  • Turkey, Argentina, Pakistan, Egypt and Qatar on new S&P list
  • Goldman says countries better positioned for shocks today

Wall Street got it wrong on BRICs and PIGS. Now, some of the world’s largest money managers say the newly minted members of the “Fragile Five” are actually fairly sturdy.

Goldman Sachs Asset Management, T. Rowe Price Group and BlackRock Inc. are among investors buying bonds from the developing nations that earlier this month earned the dubious distinction from S&P Global Ratings. The ratings company cited perceived vulnerabilities in the event of higher interest rates and tighter monetary policy globally.

The new grouping, actually a revamp of a list created four years ago by Morgan Stanley, is composed of Turkey, Argentina, Pakistan, Egypt and Qatar. Although the nations face a variety of political risks -- from tensions in the Persian Gulf to Ankara’s deteriorating relations with Europe -- current-account and fiscal deficits, excluding Pakistan, haven’t deteriorated to the same level as past members. That’s created select buying opportunities.

“The extent to which countries can respond to a shock today is arguably better than any other time in the past few years,” said Angus Bell, who helps oversee about $45 billion for Goldman Sachs Asset Management’s emerging-market debt team and is overweight Argentine and Turkish hard-currency debt as well as Egyptian local notes.

It wouldn’t be the first time a catchy label landed at the wrong moment. When former Goldman Sachs economist Jim O’Neill first introduced the moniker BRICs in 2001 for the countries he said would lead global growth over the coming decades -- Brazil, Russia, India and China -- it was actually a time to sell emerging-market equities. The PIGS -- used derogatorily to refer to Portugal, Italy, Greece and Spain in one variation -- gained traction in 2010 when going long the euro zone would have been a good bet. And when the original Fragile Five was coined by Morgan Stanley in 2013, it turned out to be a smart time to buy developing-nation assets.

“Sometimes you need to run towards the fire,” said Samy Muaddi, a Baltimore-based money manager at T. Rowe Price Group, who’s overweight Egyptian and Argentine debt. “These narratives often come at the wrong time and exacerbate fears that are unfounded.”

In coming up with the new Fragile Five list, S&P analyst Moritz Kraemer surveyed the 20 largest sovereigns by commercial debt outstanding to see who would be in the most peril should interest rates rise. Venezuela was excluded from the top five because of its own crisis unrelated to global factors, according to the ratings firm.

But the situation isn’t all that dire for most of the countries. Emerging markets are "much less susceptible" to tantrum concerns than in 2013, JPMorgan Chase & Co. analysts led by Luis Oganes wrote in a report on Tuesday.

Goldman’s Bell sees the long-term trajectories for most Fragile Five nations, Argentina and Egypt in particular, as favorable. In Argentina, Bell likes the relatively low debt levels, manageable deficits and buoyed spirits under President Mauricio Macri. Egypt’s painful economic adjustment has the chance to restore macroeconomic stability, he says. In Turkey -- where investor anxiety, as measured by one-month implied volatility, has increased the most in emerging markets over the past three months -- underlying debt dynamics are "the least of its concerns."

Even Pakistan, home to widening external deficits and shrinking foreign reserves, may be turning the corner. Corruption charges against Finance Minister Ishaq Dar and former Prime Minister Nawaz Sharif suggest national institutions are improving, according to Bell, who’s sitting out the market until next year’s elections offer more clarity.

Although the Fragile Five nations could be vulnerable to a potential dollar liquidity squeeze amid an unwinding of stimulus from the Federal Reserve and tapering by the European Central Bank, there’s no guarantee of when the tipping point will be reached, according to Pablo Goldberg, an emerging-market portfolio manager at BlackRock, who favors oil-producing sovereigns.

“Why now?” he said from New York. “There’s the risk of crying wolf too early in these environments and missing out.”

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE