Investors are starting to realize that not all emerging markets are worth the risk

on Apr2
by | Comments Off on Investors are starting to realize that not all emerging markets are worth the risk |

Eitan Abramovich | AFP | Getty Images

Currency exchange values are seen in the buy-sell board of a bureau de change in the financial district of Buenos Aires.

Argentina is in the depths of a recession having contracted 6.2 percent in the last quarter of 2019 as President Mauricio Macri grapples with high levels of inflation and pressure from the International Monetary Fund to implement austerity measures. All of this ahead of an election later in the year.

Turkey is also in the midst of stagnation. The economy contracted 3 percent toward the end of 2018, inflation is just shy of 20 percent with pass-through from the currency after the lira depreciated 30 percent in 2018.

Analysts have labeled the local elections this past weekend as a referendum on President Recep Tayyip Erdogan’s policies, but one trader told me that either way “we are likely to see more volatility as locals continue to buy dollars and are worried about the growth outlook.”

Robin Brooks, the chief economist at the Institute of International Finance, wrote in a note last week that beyond politics, “markets would like to see a shift in the growth model: away from a credit-dependent model towards a more sustainable one,” adding that one cannot assume Turkey is an isolated event as investors become increasingly wary of financing countries that are too heavily indebted/credit dependent.

2018 was a year that saw the world shaken up by a confluence of factors: tightening financial conditions, a slowing China, a global trade shock and financial market instability.

With optimism about a China-U.S. trade deal, the Fed turning dovish as well as more positive data out of China over the weekend, one could say that the worst is behind us. But what if the worst has merely been postponed as indebted countries have not used this time to repair their growth composition? Turkey is a good litmus test.

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