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Barrons / Biz - Money

Move Over BRICS. Here Comes the Fab Five…Plus One?

HSBC's Andre De Silva is sees opportunity ahead in the emerging-market debt of the "Fab Five Plus One" countries.
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BRICs was the buzzword for emerging market investors in the early part of this century, with strategists extolling the prospects for rapid economic growth in Brazil, Russia, India and China. That was followed by a period of hand-wringing about four years ago as investors fretted about the "Fragile Five," countries that had become too dependent on foreign fund flows and whose currencies were under pressure.

Many of the Fragile Five, which included India and Indonesia, are in better shape now, while emerging market debt has had a strong run this year. But Andre de Silva, head of global EM rates research at HSBC, says it is prudent to focus on the "Fab Five plus One"--Indonesia, Mexico, Brazil, Russia, Malaysia plus China as the outlook becomes a bit murkier for emerging market debt next year.

"The five are ‘fab’ because they are high yielders and net commodity exporters, which means their local bonds are expected to benefit from higher commodity prices," De Silva writes. "The ‘Fab Five’ also have benign inflation outlooks, while some are also easing monetary policy (Indonesia, Mexico, Brazil, and Russia), though not all at the same point in the cycle."

But De Silva also sees potential pain points for EM debt investors including:

  • Oil prices: At two-year highs, oil prices could impact inflation and emerging market interest rates. Large oil importers like India would be the most vulnerable.
  • Capital flows:  Low volatility and the prospects of stable emerging market currencies should support foreign investors flowing into emerging market local debt next year. (South Africa and Turkey are the exceptions considering political and policy uncertainty.)
  • Elections in several emerging markets.

As a result, De Silva sees attractive opportunities to capture sizeable carry and capital gains next year in the ‘Fab Five’ markets via 20-year Indonesia local government bonds, 20-year Malaysia, 10-year Mexico, 10-year Brazil, and five-year Russia.

The iSharesJ.P. Morgan USD Emerging Markets Bond ETF (EMB) is up 5% this year while the iShares J.P Morgan Emerging Markets Local Currency Bond ETF (LEMB) is up 11%. The iShares MSCI Emerging Markets ETF (EEM) is up 29% so far this year, nearly double the S&P 500's 17% gain.

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