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June 11, 2014

Brazil, other markets are no longer 'Fragile Five'

CHICAGO — Soccer fans will focus on Brazil and the start of the World Cup Thursday, but investors have been entranced by that nation's stock market for months.

Brazil has company. From Sao Paulo to Mumbai, investors are regaining their faith in emerging markets this year.

It's a big shift from 2013, when investment in those markets dried up because of worries about their slowing economic growth. It got so tough that five big developing markets — Brazil, South Africa, India, Indonesia and Turkey — were dubbed the "Fragile Five" by analysts at Morgan Stanley.

Now those countries are much more appealing to investors. Some have taken actions to strengthen their economies. Others have gone through political changes that have bolstered investor confidence. At the same time, slower growth in the U.S. has made investing overseas more alluring.

"These countries have done some homework to reduce their fragilities," says Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management. "They have helped themselves a bit."

The "Fragile Five" raised interest rates to draw investors' cash back into their countries. India, for example, lifted its rate from 7.25 percent in September to 8 percent in March; Brazil hiked rates from 7.5 percent in May of last year to their current level of 11 percent.

Higher interest rates are appealing to investors in the U.S., where the Federal Reserve has held its benchmark lending rate at close to zero for more than five years, and where bond yields remain low.

In India, the government has also raised duties on gold. The metal is India's second-biggest import behind oil, and purchases have soared in recent years as incomes have risen there. The increased buying has sped up the flow of money out of the country, and weakened its currency.

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