The lira is plunging in value. The stockmarket is in freefall. The banks are looking wobbly and the president is engaged in a fractious war of words with the United States. If you’re taking a holiday in Turkey this month the crisis there will make your meals and pre-dinner cocktails a lot cheaper. But for anyone else it has been a disaster. Asset prices have been punished, and most of the other main emerging markets have started to fall heavily as fears of contagion mount.
Lots of investors will be looking at that and wondering whether now is the time to buy. The answer? Probably not. There are a lot of reasons why the Turkish economy has tanked so suddenly and the mess will not be cleaned up anytime soon.
The balance of payments has been slipping deeper and deeper into deficit for months. The government deficit keeps on growing, as do the country’s debts to foreign banks – they have now grown to $454bn, or more than 50% of GDP. Sanctions from the US may well have been the final straw, but the crisis had been mounting for a year or more, and it has played out in dramatic fashion with the lira losing 70% of its value against the euro and the dollar since March.
Grab a bargain
Yet while it may not be a great time for investors to get into the emerging markets, it is a great time for companies. Any British or European business looking to build a global presence should be trying to buy an Asian, African or South American unit now. They will get a bargain. With currencies depressed, and banks running out of cash, assets will be exceptionally cheap.
Take a look at currencies first. The Turkish lira has seen the most dramatic falls, but there have been substantial falls everywhere. For a company buying in pounds, euros or dollars, any potential target is going to be 30% cheaper than it was only months ago. Bank lending will be drying up as lenders desperately try to shore up balance sheets, while steep rises in interest rates, as central banks try and defend struggling currencies, will mean many companies will be running low on cash, too. Foreign competitors who want to step in with an offer will find shareholders suddenly very keen to talk to them.
Despite that, Turkey and the other emerging markets remain the long-term growth economies. In fact, the financial turmoil may well be more contained than it has been in the past. Relatively larger foreign-currency reserves and more robust domestic economies with companies less reliant on exports mean storms can be weathered more smoothly than in the past.
Market turbulence will pass quickly
Will India be sunk by this latest bout of market turbulence? Will Indonesia, or Mexico? Certainly, there will be some short-term damage. But it will all blow through very quickly. India has been growing at a remarkably consistent 5.5% for the last decade, and is still liberalising its economy.
Indonesia is forecast to grow at 5%-plus for the next decade, while some of the stars of the African economy are still accelerating – Ghana is growing at 8% this year, and the Ivory Coast at more than 7%. Even Turkey was growing at an annualised rate of 5% as recently as last year.
In reality, the mix of young and dynamic populations, expanding commodity and export industries and low taxes that have allowed other countries to develop rapidly is still a potent one. Away from the market noise, those forces are still at work.
The long-term prize remains huge. The OECD club of developed nations predicts that by 2060 China will have the largest economy in the world. But India will be the second biggest; Indonesia will be in fifth place; even Turkey will be in seventh, only a tiny fraction smaller than Japan. These are all going to be massive markets. For any medium-sized to major business planning on building a global presence, this is the moment to buy into Turkey and other depressed markets. There may not be a better opportunity for years.