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The Fragile Five have become the Fantastic Five.
Just six months after fears of an emerging-market meltdown rattled world markets, stocks and bonds in the so-called Fragile Five economies - Turkey, India, Indonesia, Brazil and, to a lesser extent, South Africa - have become the primary targets for yield-hungry global investors.
According to research from Merrill Lynch, almost all of those countries are among the 10 best-performing assets so far this year. Indonesia, for instance, ranks No. 1, with a return of 30 percent, while Turkey follows at No. 2 with a return of 25 percent.
India had a 20.4 percent return, making it in the top 5, and Brazil returned a solid 15.2 percent so far.
The laggard fifth member of the club, South Africa, did not crack the top 10 but offered a still respectable showing, with its stock market up 10 percent for the year.
All told, not a bad half-year report card for a group of countries that, because of their volatile currencies, low levels of growth and political uncertainty, were not long ago seen as a threat to the global economy.
There have been positive developments in all the Fragile Five economies, but the real factor behind these surging markets has been the continuing environment of super loose money.
Interest rates in all the major markets, save for Britain, are edging toward zero, and assets at hedge funds and broader money management firms are hitting new highs.
More than ever, institutional investors are facing pressure to reach for yield and discount risk, and the result has been a sustained flow of cash into these markets.
"Investors' risk appetite remains buoyant and has supported flows into emerging markets over the last several months," Charles Collyns, chief economist at the Institute of International Finance in Washington, said in a recent report on flows into emerging markets.
But, he added, these flows could easily reverse if interest rates here and in other markets start to increase.
Emerging-market stock and bond markets tend to be illiquid, which means that is does not take a lot of money to send a local bond or stock soaring.
They have not been the only high risk markets attracting global money.
According to the same Merrill Lynch report, Greek government bonds, which just two years ago suffered a substantial haircut, are up 67 percent over the past year, the No. 1 return of all assets tracked by Merrill.
Not that Greece's debt profile has improved all that much: Its debt as a proportion of its overall economy is 175 percent, which trails only Japan among the most indebted countries in the world.
As has been the trend for most of the past year, bond investors have been leading the way with flows of more than $120 billion into emerging markets since January, according to the Institute of International Finance. Equity flows have been around $40 billion since then, data from the institute show.
According to eVestment, a fund tracker, hedge funds in particular have been increasing their allocations to these markets.
To be sure, the soaring stock and bond markets reflect genuine political and economic progress in these countries.
Leading the way have been election results in Indonesia and India, where new political leaders with dynamic reform agendas defeated old guard elites.
India in particular has been swept up in the euphoria surrounding its new prime minister, Narendra Modi, and many investors have, as a result, poured money into India in the hope that Modi recharges India's sclerotic economy.
In Turkey and Brazil, overall change has been more measured especially in terms of politics. But in both cases, investors have become more accepting of the risks that the countries still present: stagnant growth, high levels of private debt and stubbornly high inflation rates.
© 2014, The New York Times News Service
Markets of the Once Fragile Five Countries Are Now Soaring - NDTVProfit.com
