We are conscious that in recent days, there has been considerable media coverage of the financial ‘crisis’ developing in Turkey, following the announcement by Donald Trump of a doubling of tariffs on Turkish steel and aluminium. Beyond the specifics of Turkey’s particular problems, the media coverage has, in parts, been unnecessarily alarmist about the possibility of contagion, or the spread of the Turkish problem, to other emerging market economies.
Whilst Trump’s doubling of tariffs may have triggered the media coverage of Turkey’s financial woes, it is important to note that it certainly was not the cause of the troubles in the first place. The real culprits are no more than a combination of significant foreign borrowing by corporate Turkey, the highest current account deficit of any emerging nation, an overheating construction and property boom which is seeing so-called ‘hot’ money taking flight and inflation pushing towards 16%. Typically, the response of President Erdogan has had little in common with normal economic and financial practices, rather he has focused on rounding up Turkish journalist’s who don’t share his perspective of reality and blamed foreign powers.
With these factors in play, currency traders have been aggressively selling the Turkish lira for months and the currency has now slumped by 45% this year alone, whilst yields (interest rates) on Turkish debt have almost doubled to over 20%.
These issues are very specific to Turkey and we do not believe that they will snowball into a wider emerging markets crisis, such as the one that hit Asia in the 1990’s. Most other developing nations simply have much healthier economic and financial fundamentals to support them and limited if any economic interaction with Turkey itself.
IronMarket investors can rest easy in the knowledge that none of our investment strategies have a direct allocation to Turkey whilst investment exposure to emerging markets is limited to between 0 to 4% of portfolios, and this exposure is heavily diversified across a number of different emerging markets.