Global Investing

Waiting for current account improvement in Turkey

The fall in Turkey’s lira to record lows is raising jitters among foreign investors who will have lost a good deal of money on the currency side of their stock and bond investments.  They are also worrying about the response of the central bank, which has effectively ruled out large rate hikes to stabilise the currency. But can the 20 percent lira depreciation seen since May 2013 help correct the country’s balance of payments gap?

Turkey’s current account deficit is its Achilles heel . Without a large domestic savings pool, that deficit tends to blow out whenever growth quickens and the lira strengthens . That leaves the country highly vulnerable to a withdrawal of foreign capital. Take a look at the following graphic (click on it to enlarge) :

In theory, a weaker Turkish lira should help cut the deficit which has expanded to over 7 percent of GDP.  Let us compare the picture with 2008 when the lira plunged around 25 percent against the dollar in the wake of the Lehman crisis. At the time the deficit was not far short of current levels at around 6 percent of GDP.  By September 2009 though, this gap had shrunk by two-thirds to around 2 percent of GDP.

An IMF paper at the time praised Turkey’s response, noting that allowing the lira to weaken had limited the country’s 2009 economic contraction to less than 5 percent compared to the 8 percent fall that would have been the case, had it held the lira stable.

That adjustment is yet to happen this time – the deficit stayed almost unchanged over 2013 despite the currency’s steady depreciation against the dollar. But perhaps these are early days.

Emerging equities: out of the doghouse

Emerging stocks, in the doghouse for months and months, haven’t done too badly of late. The main EM index,  has rallied more than 11 percent since its end-August troughs, outgunning the S&P 500′s 3 percent rise in this period. Bank of America/Merrill Lynch strategist Michael Hartnett reminds us of the extreme underweight positioning in emerging stocks last month, as revealed by his bank’s monthly investor survey.  Anyone putting on a long EM-short UK equities trade back then would have been in the money with returns of 540 basis points, he says.

Undoubtedly, the postponement of the Fed taper is the main reason for the rally.  Another big inducement is that valuations look very cheap (forward P/E is around 9.9 versus a 10-year average of 10.8) .

According to Mouhammed Choukeir, CIO , Kleinwort Benson:

Looking at valuations we think emerging markets are in an attractively valued zone, hence we think it’s a good investment. EMs are in negative momentum trend but have good valuations. We’re sitting on the positions we’ve built but if it hits a positive (momentum) trend we will add on it…. You wait for value and value will translate into returns over time.

Reuters Funds Summit: Kingdom for a horse

Anyone expecting investors to start galloping back into riskier assets in a rush might have something of a wait, according to Kathleen Hughes, who runs money funds for JPMorgan Asset Management in Europe. They are more likely to wander back in.

“Risk appetite returns in stages. It leaves on a horse but comes back on foot,”  she rather neatly told a Reuters funds summit being held in Luxembourg.

There are nonetheless some signs around that show leather is getting some wear. Fund trackers EPFR Global says that although overall fund flows fell during the second week of March, there were some signs of growing risk appetite. Commodities, technology and energy sector funds as well as global emerging market equity and non-Japan Asia funds all saw net inflows.

from MacroScope:

Is the ECB driven by pride?

All the G7 countries outside the euro zone now have interest rates of 1 percent or less, prompting some grumbling in various financial quarters that the European Central Bank is being particularly stubborn in keeping its rates at 2 percent.

Now comes an interesting take on this from JPMorgan Asset Management which suggests the gap may have more to do with egg on the face than monetary policy. 

"There is a school of thought," it writes in a new note "that the ECB has been in a state of denial ever since it decided to raise rates last July.  An organisational behaviourist would observe a desire to preserve 'face' in the deliberate way by which the central bank has reversed its previous tightening stance."