Exchange traded funds that track fragile-five countries Brazil, Indonesia, India, South Africa and Turkey have been susceptible to rising trade deficits and weakening currencies. However, the cheaper oil prices could help turn things around.
According to the Bank of America Merrill Lynch, the low energy prices will help fragile-five economies narrow trade deficits and reduce inflation, reports Natasha Doff for Bloomberg.
“The deficit countries, who were at risk because of shrinking dollar liquidity and higher rates, are now becoming the Lucky Five,” Turker Hamzaoglu, an economist at Merrill Lynch, said in the article. “We have to differentiate between who benefits from this commodity price drop.”
Consequently, investors who are interested in the emerging markets may take a more selective approach, singling out country-specific ETFs that could benefit from the falling oil prices. For instance, fragile-five country ETFs include the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), iShares MSCI Indonesia ETF (NYSEArca: EIDO), WisdomTree India Earnings Fund (NYSEArca: EPI), iShares MSCI South Africa ETF (NYSEArca: EZA) and iShares MSCI Turkey ETF (NYSEArca: TUR).
Market observers argued that these five markets were vulnerable to capital flight should interest rates rise in the U.S. and the U.S. dollar appreciate, which could widen the emerging countries’ deficits and fuel inflationary pressure – the oil market is priced in U.S. dollars.
However, the countries are all net crude importers, aside from Brazil. Consequently, Indonesia, India, South Africa and Turkey will benefit from the recent 40% decline in oil prices.