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In One Chart - August 15, 2018

In One Chart: Emerging Markets Go Cold Turkey

From January 1, 2017 to January 1, 2018 the MSCI Emerging Markets ETF (EEM) gained 34.59%; in the same time period, the MSCI Turkey ETF (TUR) climbed 33.85%.

Year-to-date, EEM is down 12.3% and TUR has slid 51.1% year-to-date — 2018 could not be going more differently.

Turkey has a slew of problems which, individually and jointly, have applied downward pressure on its economy and the Turkish Lira’s value. Turkey is struggling with double-digit inflation, a huge debt burden denominated in foreign currencies, and a feud between President Recep Erdogan and the country’s central bank.

Unlike the US, a large portion of Turkish debt is issued in foreign currencies (mainly the Euro). That means when the Lira plunges, Euro-denominated debt becomes much more expensive to pay back.

The chart below shows the Lira’s plunge juxtaposed to the rise and fall of EEM and TUR.

A few factors outside of Turkey’s control have also contributed to emerging markets’ decline — the strengthening US dollar and ongoing dialogues surrounding trade wars have applied downward pressure to numerous foreign currencies and funds since the beginning of the year.

Additionally, a lack of liquidity, due in part to rising Fed rates, has caused credit to be withdrawn from more risky EM investments.

While economic growth in Turkey in recent years has been meteoric, Guggenheim CIO Scott Minerd compared the collapse of the Turkish Lira to the 1997 Thai Baht decline, which he says led to a global crisis.

compared the collapse of the Turkish Lira to the 1997 Thai baht decline

Turkey’s President Erdogan advocates low interest rates and unrestricted foreign direct investment; his near-total control of the economy has worried foreign investors. Even so, the Lira has rebounded slightly since Tuesday night on the news that President Erdogan has ramped up tariffs against the US, a retaliation to President Trump doubling tariffs on steel and aluminum.

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