Stock Market

Turkish troubles unlikely to aggravate EM worries

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ET Intelligence Group: Is Turkey in apparent danger of falling off the cliff and will the Emerging Market stocks from Mumbai to Mexico City join Istanbul in the fatal ride The probability, it seems, is not too high.

Global investors believe that Turkey’s problems — both political and economic — are unique and localised, and shouldn’t spread too far beyond the Bosporus. The current reading of the Credit Suisse Fear barometer is 18%, lower than the five-year average of 31.5.

The TED Spread is currently at 27.3 basis points, and headed downward since mid-April after touching a high of 61 basis points. After the initial panic over Turkey’s market meltdown eased, investors were seen looking for buying opportunities as EM valuations are the cheapest since early 2016.

India, meanwhile, has outperformed the EM index by 15.8% in 2018, the highest outperformance in the past four years.

Although the rupee has fallen 8.4% this year, volatility has been limited, and the currency has been largely mirroring the trend of the Dollar Index. To be sure, the Turkish Lira is the world’s worst-performing EM currency this year, down 42%.

Consequently, the MSCI EM equity and currency index dropped to about a one-year low.

Yet, the Credit Suisse Fear barometer and the Treasury Euro Dollar (TED) Spread — a gauge of financial distress in the financial markets — show that the larger universe of EMs will largely be unaffected. The Turkish economy has weathered headwinds this year.

It has a higher 10-year CAGR in Forex debt to GDP across EMs at 12.2%; for Turkish non-financial corporates (the second-highest in EM), this is at 9.6% CAGR, according to Credit Suisse. Turkey also has among the highest foreign currency debt to GDP ratio at 69.5%, with a huge mismatch between forex liabilities and the country’s geographical revenue distribution.




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