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Recent dollar strengthening, rising US treasury yields, rising oil prices and the combination of high debt levels (mainly foreign denominated debt) and large current account deficits are clearly impacting Emerging Markets (EM) – with Turkey’s markets suffering the brunt.

The continuing freefall of the Turkish lira lately reflects market concerns about the agility and autonomy of its central bank application of prudent financial policy (if not just common sense) given Erdogan’s resistance to high interest rates. Investor confidence has recently dwindled given the threat of politics trespassing into capital markets – probably overtly but certainly covertly. In the wake of further deterioration in sentiment, in a belated response, the Turkish central bank finally raised rates last night in an attempt to arrest the currency’s decline, with the CBRT hiking the late liquidity window lending rate by a whopping 300bps to 16.5%.

Notwithstanding recent commentary such as Paul Krugman tweeting about a potential Emerging Market crisis, we are of the view that EM equities could be in for a relief rally as US Dollar strength maybe showing signs of a short-term breather. Although there are indeed individual countries facing significant difficulties (i.e. Brazil, Turkey, Argentina) there does not appear to be a uniform headwind in the sector. LXM therefore agrees with many of our clients, as well as Mark Mobius’ recent comments, that selectivity is key and that there are good opportunities for investment. Such a market – where stock picking based on local insight guides profit – suits us and our clients well.

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(Reporting by Harold Warren, Global Head of Emerging Markets)