In a quiet week, with holidays in both developed in emerging economies, “drifty” core-market price action continued to offer support to our asset class. That said, as noted in our recent weekly blogs, periods of stability in emerging markets continue to be punctuated by idiosyncratic headlines on the ground; LATAM has been particularly noisy of late with political risk flaring in Brazil, Chile, Colombia and Peru. This week proved no exception, with Turkey once again returning to the headlines. In an early week interview, the President renewed his call for lower interest rates, hinting that action could come as early as this summer;
“It’s an imperative that we lower interest rates. For that, we will reach July and August thereabouts so that rates can begin to fall”.
The shock leadership overhaul at the CBT earlier this year remains fresh in the mind of market participants; this week’s comments do little to allay fears of a shift back to an unorthodox policy regime and the re-run of the currency and debt crisis of 2018. As a result, market crosshairs remained firmly trained on Turkish assets over recent days, with the lira weakening over 3% relative to the dollar in the immediate aftermath of the President’s comments.
Much like the price action following the CBT leadership change in March, volatility was broadly contained; at the time of writing, the lira has trimmed loses relative to the dollar to approx. 1.5%. Likewise, contagion into the broader emerging market complex was avoided. Looking forward, with destabilising rate cuts likely to begin in the coming months, it is no surprise that the lira remains under pressure. It is now the worst performing currency of this year, depreciating by approx. 14% relative to the dollar.
As noted last week, we remain cautious when it comes to emerging markets; ongoing US exceptionalism is highly likely to result in further market tests of the accommodative stance of the Federal Reserve, higher core market yields and episodic pressure on emerging markets. At the same time, we are cognisant of idiosyncratic risk in our asset class; the headlines in Turkey this week are a stark reminder of this complexity challenges. That said, we still believe there is money to be made in our asset class on a selective basis; we favour the emerging markets which have robust structural underpinnings to withstand the volatile backdrop; Turkey does not fit that criteria, where we have a neutral stance on the lira.
Sources
https://apnews.com/article/middle-east-europe-business-e2111074619005630ba77fb0aa388e96
Data sourced from Eurizon SLJ Capital Ltd as at 4th June 2021. ESLJ-040621-I2
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