How Emerging-Market Investors Are Playing Turkey's Crisis

(Bloomberg) -- As emerging markets take a battering from Turkey’s turmoil, with stocks and currencies near their lowest in more than a year, investors are positioning themselves to ride out the pain.

Traders pushed down emerging-market securities Monday as Turkish assets sank, before stabilizing on Tuesday. The carnage added to an already fragile landscape amid tensions between the U.S. and other major economies such as Russia and China. While some investors say bargains are emerging, others are selling stocks and bonds and holding cash.

Here’s what analysts and investors are saying:

• Kevin Daly, a money manager at Aberdeen Standard Investments in London:
  • The almost-$800 billion investment group sold some emerging-market holdings on Monday to increase its cash positions.
  • Daly sees few signs the Turkish rout will end soon and says emerging markets as a whole could be in for further pain.
  • “Playing a market like this is difficult,” he said. “There aren’t any obvious safe zones.”
• Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors Ltd:
  • AMP increased its exposure to the yen, dollar and Swiss franc because they’re havens during tumultuous times
  • He’s short the Russian ruble, Indonesian rupiah and Philippines peso and says “the risk of a market meltdown is high.”
  • EM currencies might be attractive again if they fall another 10 percent, he said. For now, the only equities he’s interested in are China’s, given the nation’s current-account surplus and ability to loosen fiscal and monetary conditions if it wants to.
• Jan Dehn, head of research at Ashmore in London:
  • The selloff has left emerging markets “replete with opportunity.”
  • While Turkish assets probably haven’t bottomed yet, it is time to buy stocks, bonds and currencies elsewhere, he said.
  • Turkey’s problems are “entirely self-inflicted and will not suddenly appear in, say, Poland or Uruguay.”
• Hans Redeker, global head of foreign-exchange strategy at Morgan Stanley in London:
  • Investors should short South Africa’s currency against Japan’s yen, targeting an 8 percent strengthening of the latter to 7.1 per rand from 7.67.
  • “With ongoing weakness in Turkey, investors will have to add hedges in EM,” he said. “South African government bonds remain the top overweight duration in the foreign portfolio. This means foreigners have to buy USDZAR to hedge their bond position and reduce overall EMFX beta risks.”
• Mark Mobius, co-founder of Mobius Capital Partners LLP:
  • The turmoil is creating opportunities, including in Brazilian consumer stocks, the veteran emerging-markets investor said in a Bloomberg TV interview.
  • But traders need to be careful because there’s a “real possibility” Turkey will impose capital controls, which would be “very, very bad news” for developing-nation assets
  • China’s yuan will probably decline even more if Beijing’s trade war with Washington worsens
• Nicholas Ferres, chief investment officer at Vantage Point Asset Management in Singapore:
  • The hedge fund has added exposure where there’s been an “emotional overreaction,” he said.
  • Ferres is betting on a rebound in the currencies and stocks of India and Indonesia and says the dollar’s strength is “well advanced.”
• Toru Nishihama, emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo:
  • The lira may stay under pressure as issues in Turkey and its tensions with the U.S. have not improved
  • Ankara’s measures only tweak things in the short term, while nothing fundamental, such as central bank independence, has been resolved
  • Could South Africa be hit next because of its weak fundamentals, or Russia as its relations with the U.S. deteriorate, or Mexico where the peso has strengthened on expectations surrounding the new president but no concrete outcome has been delivered?
  • Asia is probably the most resilient region, but close attention needs to be paid to the yuan. A decline beyond 7 per dollar would be a blow to other Asian currencies
• Maximillian Lin, emerging-market Asia strategist at NatWest Markets in Singapore:
  • NatWest Markets is buying the greenback against Singapore’s dollar and South Korea’s won and says those trades will improve if there’s further Turkish weakness, though India’s rupee and Indonesia’s rupiah will be hit harder
• Takeshi Yokouchi, senior fund manager at Daiwa SB Investments Ltd. in Tokyo:
  • “I don’t see a bottom just yet for the lira and I’ve reduced my exposure to emerging-market assets in general for now”
  • He raised yen-cash positions; although there may be some risks for financial institutions in Europe due to their exposure to Turkey, this is unlikely to become a significant global risk
  • From a medium- to long-term perspective, the lira may rebound as Turkey offers higher yields, and when that happens, the turnaround could be quite fast

--With assistance from Ben Bartenstein and Abhishek Vishnoi.

To contact the reporters on this story: Paul Wallace in Lagos at pwallace25@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, ;Rita Nazareth at rnazareth@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand

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