Turkey is heading for “a vicious cycle of inflation and depreciation”, Timothy Ash of BlueBay Asset Management tells Tommy Stubbington in the Financial Times. With inflation running at 19.89% and the Turkish lira plummeting, there is talk of a new currency crisis.
The lira has lost 40% of its value so far this year. As of Tuesday it had recorded 11 successive record lows against the dollar in as many days, say Daren Butler and Nevzat Devranoglu on Reuters.
Back to 2018
The latest sell-off came after the central bank cut interest rates to 15%, the third cut since September. Interest-rate cuts reduce the attractiveness of lira-denominated assets, causing investors to sell them in favour of other currencies. At the new interest rate, savings in a Turkish bank account would earn a real return of -4.89%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
President Recep Tayyip Erdogan continues to believe that high interest rates cause inflation, despite ample evidence – not only in his own country – that the opposite is true. He has fired central bankers who didn’t toe the line on easy money.
Things are starting to look a lot like 2018 again, when the lira “dropped precipitously amid a crisis in relations with the US”, say Jared Malsin and Patricia Kowsmann in The Wall Street Journal.
A plunging currency is “driving up the cost of [imported] food, medicine and other essentials for average Turks”. Some commentators fear a bank run. Yet despite growing signs of discontent, Erdogan appears determined to stay the course; indeed “he has intensified his calls for low interest rates”.
Things got so bad in 2018 that policymakers were eventually forced to reverse course with emergency interest-rate hikes, says Craig Mellow in Barron’s. That sent local stocks up by “a third in four months”. Yet few are betting on a repeat this time.
Since 2018, “Erdogan has replaced professionals at the central bank with yes men”. Global inflationary pressures are amplifying domestic problems, while Covid-19 continues to weigh on the important tourist sector.
Emerging markets disappoint
Trouble in one emerging market can quickly spread to others, says Shilan Shah of Capital Economics. Investors in the asset class may panic and sell indiscriminately. Yet any such “financial contagion” is likely to be “much more limited” this time than in 2018.
Turkey aside, most big emerging countries appear to have the foreign-exchange reserves they need to ride out any turmoil. What’s more, non-residents’ holdings of Turkish stocks and government bonds are down by two-thirds since 2018. Foreign investors won’t be panicking and pulling funds from Turkey – most of them have already left.
This was supposed to be a good year for emerging markets as “broad global reflation” took hold, says John Authers on Bloomberg.
Instead, the MSCI Emerging Markets index has flatlined while developed markets power ahead. Collectively, stocks in the Bric countries (Brazil, Russia, India and China) are “still below the peak set on Halloween 2007”.
During the profitable first decade of this century investors used to argue that emerging markets would grow even if the developed world sagged, a concept known as “decoupling”.
Decoupling – but lagging
Since 2011 they have decoupled alright – but in a bad way: they have done much worse than the rich world. Risk-hungry investors used to bet on developing countries. “These days, they prefer developed markets, however good their risk appetite is.”
Much of the underperformance this year comes from China, where a crackdown on tech firms and a property slump have weighed on stocks, says Udith Sikand of Gavekal Research.
Chinese shares account for one-third of the MSCI Emerging Markets index. If you strip out Chinese equities, the rest of the index has gained a 10% this year (although developed markets have done better).
While financial commentators focus on “Turkey’s Canute-like efforts” to defy economic logic, most emerging countries are much more responsibly run and many look “undervalued”.
Investors live dangerously
The rise of Asian mega-caps means that a typical emerging-market tracker now resembles an emerging Asia one, says Cherry Reynard in the Investors’ Chronicle.
“About three-quarters of MSCI Emerging Markets index’s capitalisation [is] made up of Asian giants China, Taiwan, South Korea and India.” Just 4.5% is Brazilian shares. With Chinese growth ebbing, asset managers are starting to “reappraise their weightings” and look for opportunity elsewhere.
One asset manager tells Reynard that Russian valuations are attractive and offer exposure to higher commodity prices. Another has bought South African equities, citing “strong growth at extremely cheap valuations”.
Some bets are even riskier. Sikand thinks growth could eclipse forecasts in Brazil because of strong commodity exports, but admits that a soaring fiscal deficit and a contentious election next year mean that Brazilian bargain hunters will be “living dangerously”.
After such a torrid year there are bargains in emerging markets. But investors will need a hearty risk-appetite to take advantage.
-
Most expensive street in Britain to buy on has houses with '£10m average asking price', Rightmove findsNews Rightmove found Buckingham Gate, close to Buckingham Palace, was the most expensive street in the country. Do you live near one that's been included on the list?
-
Smaller companies: starting to turn?The long-awaited turnaround in smaller companies is unlikely to happen just because shares are lowly-valued. However, an improving economic and interest rate backdrop could spark renewed interest in the sector. M&A activity is also providing support for the smaller companies sector
-
Why you should keep an eye on the US dollar, the most important price in the worldAdvice The US dollar is the most important asset in the world, dictating the prices of vital commodities. Where it goes next will determine the outlook for the global economy says Dominic Frisby.
-
Sterling accelerates its recovery after chancellor’s U-turn on taxesNews The pound has recovered after Kwasi Kwarteng U-turned on abolishing the top rate of income tax. Saloni Sardana explains what's going on..
-
Will Liz Truss as PM mark a turning point for the pound?Analysis The pound is at its lowest since 1985. But a new government often markets a turning point, says Dominic Frisby. Here, he looks at where sterling might go from here.
-
Are we heading for a sterling crisis?News The pound sliding against the dollar and the euro is symbolic of the UK's economic weakness and a sign that overseas investors losing confidence in the country.
-
The US dollar is rising to dangerous levels – here’s what to do about itAnalysis The US dollar is back on the rise as panicky investors head for safety. That’s rattling markets across the world, says Dominic Frisby. Here’s how to cope.
-
Investors dash into the US dollarNews The value of the US dollar has soared as investors pile in. The euro has hit parity, while the Japanese yen and the Swedish krona have fared even worse.
-
Why a strong dollar hurts – and what you can do about itAnalysis The US dollar is at its strongest level in 20 years. That’s bad news for most investment assets, says John Stepek – here’s why
-
Can anything stop the dollar’s devastating bull run?Analysis The US dollar has been on a massive bull run for the last year or so. Commodity prices are sliding, and the euro – maybe even the pound – could hit parity. But when it turns there will be mad scramble, says Dominic Frisby. Here, he looks at what might halt the runaway dollar.
