Investors may be eyeing off value in emerging markets after the recent sell-off triggered by concerns about the Turkish economy.
Emerging market (EM) shares in local currency terms are down around 14% from their January high, and emerging market currencies are down 16% since their February high.
Emerging markets are now trading on a forward PE of around 11 times, making them quite cheap, as are their currencies.
But the troubles in Turkey, which have prompted its equity markets and currencies to tumble, are likely to continue as the underlying problems in its economy persist.
Turkey is experiencing very high rates of inflation and its central bank is probably going to have to raise rates further to combat that. So, the volatility and uncertainty around Turkey will continue.
The real problem is the contagion effect those concerns have on other emerging market countries. As we have seen in the past, when one emerging market gets into trouble, investors look around for others that might be in trouble too.
The concerns around Turkey have already spread to Argentina; investors are worried the problems will also spread to Brazil and other emerging markets, which is weighing on their shares and currencies.
Foreign investors are happy to put money into emerging markets during good times but they’re now fretting those countries may not be able to service their loans, particularly if they have borrowed in $US.
The US is raising rates, which continues to put upward pressure on the $US, making it more expensive to service loans in that currency.
Investors have other concerns too around emerging countries’ vulnerability to the threat to global trade, and uncertainty around slowing growth in the Chinese economy.
When you throw in worries about specific countries like Turkey it creates ongoing issues around emerging markets. This means that worries about emerging markets will probably continue for a little while yet.
There is good value in emerging markets if you take a longer-term, say a five-year, view. But investors need to be aware that we may see some more downside in the short term before we ultimately bottom out in these markets.
From a historical perspective, the declines we are currently seeing in emerging markets are mild. They crashed 27% in 2015-16 and they could fall further now if the $US continues to rise, making debt servicing harder in the emerging world.
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