The Turkish lira was already the world’s worst performing currency over the last 12 months before its sell-off accelerated dramatically last week.
Fears over the country’s large debt pile, much of which is owed in foreign currency and due for refinancing soon, have been exacerbated by the country’s deteriorating relationship with the US, worsened on Friday by a doubling of tariffs on steel and aluminium.
Investors have taken fright at soaring inflation coupled with president Recep Tayyip Erdogan’s opposition to tackling it with higher interest rates.
The worst hit funds have been the small number that invest solely in shares of Turkish companies. No UK-based fund is this specialist, but there are some Luxembourg-based funds available to UK investors with a pure Turkey focus.
Among emerging Europe funds, investment trusts have taken the largest knocks, with shares in Baring Emerging Europe (BEE) down 5.8% over the last week and BlackRock Emerging Europe (BEEP) falling 4.9%. They hold 10% and 8% of their respective portfolios in Turkish stocks, according to Numis.
'It's not too late'
Matthias Siller (pictured), manager of the Baring trust, said Erdogan had ‘scored several own goals’ in his management of the crisis.
‘However, from our perspective it’s not too late to stop the currency rout, and importantly we think private sector banks are capitalised well enough to mitigate currency risk, even after the substantial depreciation of the Turkish lira.
‘But clearly this is a crisis of confidence in the Turkish financial system and we urgently need to see decisive actions by Turkish policy makers to prevent a full-blown crisis.’
Open-ended funds with a focus on emerging Europe are not yet showing losses of the same extent, although that is down in part to their prices not yet reflecting the impact of yesterday’s renewed sell-off.
For funds investing in the country’s bonds, losses have been less acute: Threadneedle Emerging Market Local, with a 6.1% position in Turkish debt, was the biggest faller over that period, but was only down 1.1%.
'More pain might be needed'
Delphine Arrighi (pictured), who holds 6.9% of her Old Mutual Local Currency Emerging Market Debt fund in Turkish bonds, and 4.3% of her Emerging Market Debt fund, said an interest rate hike was needed to stem the sell-off.
‘The lack of credible policy response is pushing Turkish asset prices into a tailspin,’ she said. ‘Local rates are now pricing in close to 900 basis points of rate hikes to stem the currency depreciation.
‘However, given the reluctance of the Central Bank of the Republic of Turkey to hike rates at its previous meeting and president Erdogan’s recent comments blaming an international conspiracy rather than acknowledging the real economic crisis resulting from an overheating economy faced with tighter global financial conditions, there is little hope for a return to orthodox policies at this stage. More pain might be needed to force policy action.'
Turkish woes have also spilled over into other emerging markets, particularly their currencies. A sell-off of the Russian rouble sparked by fresh US sanctions has accelerated, with the currency having fallen nearly 5% against the pound since Wednesday.
Over the last three trading days, the Argentinian peso has lost 7.1% against the pound, South Africa’s rand is down 5.2% and Mexico’s peso has fallen 2.6%.
'This is almost entirely self-inflicted'
Shares in Ashmore (ASHM), the emerging markets funds specialist, have fallen nearly 10% since the middle of last week as the Turkish crisis has unravelled.
Its head of research Jan Dehn (pictured) said investors should ‘ruthlessly’ exploit weakness in other emerging markets on the back of Turkey’s problems.
‘We remain underweight Turkey as we have done for some time, but it’s important to remember that this is almost entirely a self-inflicted Turkish issue,’ he said. ‘No other emerging markets country has a president who believes higher rates cause inflation.
‘Investor sentiment towards emerging markets more widely can temporary weaken, which is normal in periods of risk aversion, but such price action is not justified.
‘If asset prices decline in other emerging markets just because Turkey does not have its house in order this should be viewed as a buying opportunity and exploited ruthlessly.’