Only the brave should venture into Turkey

Hardly a safe harbour, but it has its charms
The market panic over Turkey has abated in the past few days. The embattled lira recovered slightly last week, although it has still fallen by 40% against the US dollar this year. As for the risk of contagion, other currencies and stockmarkets, notably the Indian rupee and the South African rand, slipped sharply before settling down. Brazil has also wobbled. Investors shouldn’t relax just yet, however. The scale of Turkey’s foreign debts is the key worry. As we noted last week, Turkey’s erratic president, Recep Tayyip Erdogan, could choose to stiff the country’s foreign creditors, implying a default on $500bn of loans. Assuming this doesn’t happen, however, the crisis does not appear “fundamentally contagious”, according to The Economist.

Europe’s banks can cope
One key problem is that the local subsidiaries of European banks have lent Turkey $150bn; the sector slid sharply on the stockmarket last week. The majority of those loans belong to Spanish banks, especially BBVA, which owns half of Garanti, Turkey’s second-largest private bank. Italy’s UniCredit and France’s BNP Paribas are also exposed. At present, only 3% of Turkey’s loans are non-performing, but defaults will rise sharply as the local credit boom subsides and the falling lira makes foreign-currency debt heavier. “In a worst-case scenario, European parent banks would walk away from their local affiliates and write off the equity losses,” says The Economist. But that, it reckons, shouldn’t threaten their solvency.
On the macro level, meanwhile, Turkey accounts for only about 1% of the global economy, and it doesn’t do much trade except with its neighbours, as Capital Economics points out. Nor should we necessarily expect the stockmarket swoon to engulf the region. The UK stockmarket alone is 50 times bigger than Turkey’s, and four-fifths of the stocks are owned by Turkish residents. This doesn’t preclude the confidence factor, of course, and we have already seen some other markets falter.
A buying opportunity?
Nonetheless, emerging markets have made significant structural improvements in the past decade or two, with inflation, debt and political stability all looking healthier, and this should militate against a protracted generalised sell-off. This dip, then, may spell opportunity. Betting on emerging markets “at this juncture would be gutsy”, notes The Economist’s Buttonwood column. But “sometimes the time to buy is when others are scared”.
In 1998, after Russia’s default, emerging-market stocks reached a low, but then doubled within 18 months. “Unloved asset classes have at least one charm – they tend to sell at a discount.” Consider that the price-earnings (p/e) ratio for the MSCI Emerging Markets index is 14, a tad below its average since 1996, compared with a p/e of 23 in the US. America’s equity market “has been even dearer relative to emerging-market stocks in the past – but only rarely”. Investors with long time horizons “may find it worthwhile to take a look”.

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