Turkey’s currency cooked?

by: , Portfolio Strategist, New York Life Investment Management

What happened in emerging markets?

Recent troubles in select emerging and developed countries were exacerbated late last week by a slew of sanctions targeted at Turkey, Iran, and Russia alongside fears of escalating political tensions. U.S. equity markets were unfazed, with currencies taking the brunt of the hit.

The Lira, Real, Ruble, and Euro continued their downward trends against the dollar, with the Turkish Lira hitting new lows against the dollar. However, currency weakness was widespread. A basket of emerging market currencies is down 15% from its February 2018 high, with no support in sight.

Why does it matter?

Emerging markets, broadly, are under pressure, but not in crisis yet (other than Venezuela). The move in emerging currencies is meaningful. A depreciated currency means (1) less earnings for multinational corporations in dollar terms and (2) higher cost of debt service for borrowers in those countries. Both issues can negatively impact foreign direct investment. Further, since many global products are priced in dollars, depreciated currency also means (3) higher inflation, pressuring central banks to raise interest rates and curtail growth.

A major concern would be contagion, whereby the shock spreads to the global economy either directly or indirectly. The most concerning linkage is to European banks, which have direct exposure to Turkey through their corporate lending. A weaker local currency calls into question the ability of Turkish companies to pay back their Euro- or USD-denominated debt.

For investors

We remain overweight equities in total, as we believe U.S. and global economic growth will lift risk asset pricing through 2018. International equities continue to offer an attractive value relative to the United States, but strong negative momentum indicates a bumpy ride for the near term, as the risk of contagion is present. As a result, we hold our ground, remain attentive, and wait to see how developments unfold.

Looking ahead

Recent events like these raise many questions, invite historical comparisons, and remind investors of important asset allocation and portfolio construction considerations. Our team will follow these events closely including:

  • The risk of contagion
  • Potential impacts on the Federal Open Market Commitee (FOMC)
  • The effects of rising emerging market (EM) inflation
  • Momentum and sentiment

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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