Speaking to InvestorDaily, AMP Capital chief economist Shane Oliver noted that Turkey had already been weighed down by a number of issues before their currency plunged by as much as 17 per cent on Friday.
These headwinds included high budget and trade deficits, political and economic mismanagement as well as political interference with Turkey’s central bank.
The ‘straw that likely broke the camel’s back’ was the doubling of steel and aluminium tariffs by the US after Turkey refused to hand over a US pastor.
These concerns about Turkey had spread to other developing countries, Mr Oliver said.
“I guess what’s happened in last few days is it’s put renewed pressure on emerging market shares. And whenever they get into trouble it often causes anxiety in developed country shares as well because there’s a worry that … we’ve got exposure to emerging worlds.”
“I think the fears regarding Turkey specifically are overdone. But I would have to concede that there is a broader issue here concerning the emerging world.”
So long as the US kept hiking interest rates and the US dollar continued to rise, then the uncertainty regarding emerging markets would remain given that emerging countries often had US dollar denominated debt, Mr Oliver told InvestorDaily.
“These worries about the emerging world will probably be with us for a while yet, even though the specific concern regarding Turkey at the moment is a bit over the top.”
Emerging markets had been under pressure for some time recently, having reached a peak at the end of 2017, Mr Oliver pointed out.
“Late last year or early this year was the ideal time to rethink their allocations in the emerging world.
“It is worth considering their exposure to emerging worlds because emerging market shares could still have more downside ahead,” he advised investors.
Ongoing concerns about trade wars also weighed particularly heavily on emerging markets given that they tended to be more vulnerable to both trade wars as well as China.
“It’s ideally a time to have a more modest exposure to emerging works than you might otherwise have had.”
However, JP Morgan Asset Management global market strategist Kerry Craig said that while markets were “skittish” and investor sentiment would be dampened in the short term, Turkey’s issues were of a domestic nature.
“The drivers of the lira’s decline are very specific to Turkey – therefore it should not derail the positive fundamentals in other emerging markets over a longer-term.
“Currencies have been discerning this year in how they have behaved based on external positions. The big declines in the lira, the rand, and the Argentine peso have not been mirrored in many Asian currencies given the smaller current account deficits (or even surpluses).
“This is reassuring in that the market is differentiating between the strong and the weak,” Mr Craig said.
