Goodbye 'Fragile 5', Hello 'Great Convergence'

NEW YORK (TheStreet) -- If you are an investor and are not familiar with term "Fragile 5," consider yourself lucky. The term was invented last August but resurfaced early this February as emerging markets were down more than 10% on the year.

There was a flurry of headlines at the time about "The Fragile 5," and every major financial news channel had a special on these five Emerging Market countries that were supposedly in a "crisis."

This negativity drove retail and professional investors to capitulate and sell their remaining emerging-market holdings. As such, we saw record outflows from emerging-market equity funds at the February low, and professional money managers were reporting a record underweight in their emerging-market holdings.

Fast forward two months and what has transpired is a classic example of how wrong the crowd can be at extremes. These five countries -- Brazil, India, Indonesia, Turkey, and South Africa -- have all posted substantial rallies since their February lows and are now up on the year (see chart below). So much for fragility.

Even more surprising to many would be that four out of five of these countries are outperforming the Russell 2000 (IWM) this year. Additionally, emerging-market credit as measured by the iShares JPMorgan USD Emerging Market Bond Fund (EMB) is actually outperforming U.S. credit as measured by the iShares iBoxx High Yield Corporate Bond Fund (HYG). This is important as credit typically leads and any remaining notion of an ongoing crisis in emerging markets should be dispelled as their credit markets are outperforming our own.

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