8 Oct 2018
In a market where contagion fears can run wild, it is important to revisit the thesis that not all emerging markets are lemons.
Since our last piece on emerging markets, the asset class has continued to decline, with Turkey being the latest to tumble into a depreciation trap, falling an estimated -24.5% since May 21. Investors by now are familiar with the narrative surrounding emerging markets this year: that emerging markets are hurt by the appreciating U.S. dollar and retreating capital flows driven by the drawdown of global liquidity.
While emerging markets rely on dollar-based funding, Turkey is an outlie, facing a confluence of external and internal factors: withdrawal of global liquidity, the rising U.S. dollar, over-extended credit growth, high external debt, and wide current account deficits financed by capital flows. The deterioration in governance only compounded these issues, and the latest U.S. sanctions acted as a catalyst.