Turkey’s meltdown rippled across emerging markets, sending stocks and currencies to their lowest levels in at least a year.
The lira led losses among global peers after the nation’s first steps to bolster the financial system were seen by some analysts as insufficient to protect markets. As President Recep Tayyip Erdogan lashed out at the United States, took higher rates off the table and said he wouldn’t accept an international bailout, traders pushed down Turkish assets in a selloff that spilled over to other developing countries. The rand’s one-month implied volatility soared by the most since December 2015, while the Argentine peso touched 30 per dollar.
“It’s another Manic Monday,” said Jordan Rochester, a currency strategist at Nomura International in London. “We go through the list of options they have to stop this: it involves rate hikes, getting the International Monetary Fund involved and restoring market confidence in the lira. Unfortunately, all the components are going the other way.”
Fear that the Turkish meltdown will keep punishing emerging markets resurfaced on Monday as traders also grappled with tensions between the US and major economies, such as Russia and China. Still, many analysts say there are few fundamental reasons to add the whole developing world to the same basket, as several countries have done their homework. That means: while the stress in Turkey may continue, its correlation to the rest of the asset class may decline soon.
“EM has already seen a large selloff between April to July, and negative developments in Turkey will eventually be seen [along with Argentina] as isolated given their exceptional external imbalances compared to most EM countries,” JPMorgan analysts, including Luis Oganes and Jonny Goulden, wrote in note to clients.
In fact, Argentina took emergency steps to stabilize its currency in the wake of an emerging-market rout caused by Turkey’s crisis, jacking up its already highest-in-the-world interest rate by 5 percentage points and outlining a plan to eliminate short-term notes.
Regardless of what happens to emerging-market currencies from here, most central banks aren’t likely to respond to the recent bout of weakness as inflation is low in most cases, according to Edward Glossop at Capital Economics in London.
“There are a handful of central banks that are more jittery—Mexico, South Africa and Indonesia,” the economist wrote. “If we are right in thinking that currencies will stabilize over the next few weeks, policy-makers in Mexico and South Africa should refrain from raising interest rates at their upcoming meetings. Indonesia is the exception. With its next meeting scheduled for Wednesday, there is little time for the recent bout of turmoil to subside.”
Turkey’s market turmoil didn’t just erase a July rebound in emerging-market stocks—it also made them the cheapest since early-2016, before a two-year, 60-percent rally. At 10.8, the MSCI Emerging Markets Index’s 12-month blended forward price-to-estimated earnings ratio is now also below where it was after a sell-off in the second quarter.
While some analysts say they are happy to nibble at stocks, they aren’t really diving in. Equities in developing markets will likely remain turbulent with little sign of stability to lure bargain hunters despite Monday’s selloff, according to UBS Asset Management.
“We see building value, but you have no visibility on when that value can be realized,” said Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset in Singapore. Investors can be forgiven for feeling wary, “given that we’ve got a 1-2-3-4-5-6 punch, not just a 1-2 punch.”