Turkey is in crisis. The country’s currency, the lira, plummeted by 14% on Friday and another 8% on Monday following President Trump’s announcement of a doubling of tariffs on imports of steel and aluminum from Turkey.
It was the latest salvo against a currency that has been in absolute free fall—down 46% against the U.S. dollar so far in 2018—leading to dire consequences for Turkey’s economy and stock market.
“This is a textbook currency crisis that’s morphing into a debt and liquidity crisis due to policy mistakes,” Win Thin, strategist at Brown Brothers Harriman & Co., told Bloomberg. “The way things are going, markets need to be prepared for a hard landing in the economy, corporate defaults on foreign currency debt, and possible bank failures.”
Markets are keenly aware of how dire the situation is for Turkey’s economy. The iShares MSCI Turkey ETF (TUR) is down 55% year-to-date, making it the worst-performing single-country ETF of 2018.
But it’s not the only ETF of its kind getting hammered. A host of other single-country ETFs are down double-digit percentages—most of them tracking emerging markets—as contagion spreads throughout the broader asset class.
Here we run down some of those funds:
iShares MSCI Turkey ETF (TUR): Down 54.7%
Far and away the worst-performing single-country ETF, TUR’s losses are more than double that of the No. 2 fund on our list. How bad is the outlook for Turkey?
- The country is sitting on foreign-currency debt equal to about half of annual GDP after years of growth-at-any-cost policies—debt that is increasingly costly as the lira plunges
- The current account deficit exceeds 6% of GDP
- Inflation is running at a sizzling 16%, and is set to worsen with the lira’s slide
- Interest rates are nearly 18%, but even higher rates may be needed to stabilize the currency
- President Erdogan is seemingly running all the important institutions in the country, including the central bank, which he has dissuaded from hiking rates
- As a result of all of the above, the currency is in a free fall
There are no easy solutions to escape the vicious cycle Turkey finds itself in. Analysts say some combination of interest rate hikes, economic rebalancing that reduces growth and deficits, or even an International Monetary Fund (IMF) bailout may be necessary.
The longer President Erdogan waits to accept these realities, the longer it will take to get through the crisis, they say. Economic growth, which topped 7% in the second quarter, could soon slip into negative territory, and even when the downturn eventually ends, the new growth trajectory for Turkey is likely to look a lot different than that of the past several years.
Global X MSCI Argentina ETF (ARGT): Down 22.4%
Argentina may have gotten the nod from MSCI to be added to its widely benchmarked MSCI Emerging Markets Index next year, but that hasn’t stopped Argentina stocks from tumbling. The Global X MSCI Argentina ETF (ARGT) and the other Argentina-focused ETF, the iShares MSCI Argentina and Global Exposure ETF (AGT), are down more than 20% year-to-date.
There are more than a few parallels between the crisis engulfing Turkey and the situation in Argentina. The latter also has twin deficits, rapid inflation, sky-high interest rates and a tumbling currency.
But while Turkey’s president remains intransigent, his Argentine counterpart, Mauricio Macri, seems to be doing everything by the book to right the economic ship.
The business-friendly president orchestrated a $50 billion IMF bailout in June, and promised to reduce the government’s budget deficit and bring down inflation.
The moves brought some stability to Argentine markets. AGT and other ETFs targeting the country rebounded from their worst levels in July. However, the Argentine peso remains under intense pressure, last touching an all-time low on Monday of 30 per U.S. dollar.
iShares MSCI South Africa ETF (EZA): Down 21.2%
Compared with some other emerging markets, South Africa isn’t doing so badly. Inflation is a relatively benign 4.5%; GDP is growing at an underwhelming-but-still-positive 1.5%; and the country doesn’t have a huge burden of foreign-currency-denominated bonds.
Even so, the broader retreat in appetite for emerging market assets has hurt South Africa equity and debt, which are heavily owned by foreign investors. Around 40% of South Africa’s stocks and bonds are owned by foreigners—among the highest percentages in the emerging markets—leaving asset prices susceptible to rapid portfolio-related inflows and outflows.
The iShares MSCI South Africa ETF (EZA) is down 21.2% so far this year.