The crisis in Turkey and what it means for your portfolio

Earlier this month, Turkey’s worsening economic woes were on the front pages of financial news, sending stock markets around the globe down. For the last few years, the Turkish government and corporations have borrowed heavily from foreigners. But this summer, investors grew particularly worried about the prospects for the Turkish economy and their investments in it. High growth has been accompanied by rising inflation, now reaching 15% annually. But the central bank has been prevented to raise interest rates by the country’s President, Recep Tayyip Erdogan. The President’s increasingly autocratic style of government has also been a growing source of concern. To make matters worse, Turkey and the United States are feuding over an American Presbytarian pastor, jailed and accused by Turkey of plotting a coup. The U.S. imposed tariffs on Turkey and are threatening further sanctions. The Turkish lira, which had already fallen significantly against the U.S. dollar over the last few years, plummeted by 30% in a few days and is down almost 40% so far this year. (see this article in the Economist for further details)

Turkish Lira to U.S. Dollar, last 5 years

Turkish Lira vs U.S. Dollar, last 3 months

Source: Investing.com

If the face of all these headlines, what are the implications for your investment portfolio and what should you do? If you invested in the Turkish stock market, you’re looking at some steep losses. From its peak at the end of January, the Turkish stock market has dropped about 30%, according to data by MSCI. However, due to the fall of the lira against the U.S. dollar, this translates to a 50% plunge when measured in the U.S. currency. Any way you look at it, there’s no doubt that these are tough losses to absorb in such a short amount of time. Though Turkey is not in a recession yet, this outcome seems to be increasingly likely and this is a bad time to be invested in or to consider investing in the country.

Source: Investing.com

For North American investments, on the other hand, the developments in Turkey are not a factor. The stock markets on this side of the Atlantic went down initially as the crisis intensified around August 10th. But they have since recovered, as American and Canadian companies have very little business with Turkey. For European stocks, there should not be a major impact. European banks leant heavily to Turkish government and companies. However, their exposure seems containable. For the most exposed European bank, about 13% of its profits came from Turkey. Other banks have far lower numbers. Even if these banks need to write off their loans and investments in the country, it would not be a big blow to their business. Furthermore, the European Union’s economy is not dependent on Turkey’s economy, so a recession in the latter would have very little direct impact on the health of the E.U.’s economy. Therefore, diversified investments in Europe should not be directly affected in the medium-to-long term.

For investments in emerging markets, the view is slightly more complicated. Diversified emerging markets funds have very little exposure to Turkey. Vanguard’s emerging markets stocks exchange-traded fund (ETF) has about 1% invested in Turkey, iShares emerging markets stocks ETF has less. In regards to fixed-income investments, the Vanguard emerging markets government bond ETF has just over 3% in Turkey, as does the Cambria Sovereign Bond ETF. Therefore, investments in broad emerging markets funds should not see to much direct impact. More likely, the fallout from the crisis could see investors be on the lookout for signs of trouble in other emerging economies. Other countries’ currencies, from the South African rand to the Argentine peso, have been hit hard because of the worries over Turkey. While some countries have high inflation and high current-account deficits, few come close to Turkey’s levels and none have hindering policymakers. Instead, more likely, fear might make investor over-cautious in regard to other economies. Also, if diplomatic issues worsen, these could have economic repercussions in emerging markets and to Europe too. But these issues are far beyond any financial analysis and are too complex to anticipate.

In conclusion, unless a significant portion of your overall portfolio is directly invested in Turkey or in companies exposed to Turkey, the impact to your portfolio is negligible. There is always a crisis that financial markets and media will highlight, no matter how unlikely they are to have an impact on your investments. But overall, as things currently stand, there is no reason to deviate from your current investment plan.