Investment Insights: Investors go cold Turkey

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

After four straight days of losses, U.S. stocks ended yesterday in positive territory before sliding again today.

Portside at Istanbul, with ships near the coast and large, historic mosue visible in the distance.The S&P 500 broke its 1.20% losing streak by gaining 0.65% on Tuesday. Investors started to show resilience after fear rippled through the markets from deteriorating economic conditions in Turkey, with a corresponding decline in its currency, that some believed could spread to other countries. The Turkish lira fell over 20% against the U.S. dollar as foreign exchange exasperated existing economic issues, and the U.S. dollar hit a 14-month high. While news outlets may point to a change in trade policy from the U.S. as the culprit for a massive decline in the lira, the larger contributor was likely Turkey’s already weak fundamentals.

Global stock markets declined after the U.S. doubled tariffs on steel and aluminum from Turkey in response to the Turkish government detaining an American citizen on conspiracy charges, which sparked the most recent selloff in the lira. However, a lower Turkish currency is not news to foreign exchange traders. The Turkish lira is one of the worst-performing currencies over the last two years, declining over 40% during the period, according to Bloomberg data. Turkey’s economy has struggled over the past several years due to general emerging market headwinds, like rising rates in the U.S. and cyclically lower commodity prices. Its main economic woes likely stem from an ongoing bust in construction, high levels of debt held within its banking system, and government borrowing. The inflation rate in Turkey reached 15.85% in July, according to the Turkish Statistical Institute. Turkish officials have attempted to quell investor anxiety by lowering the country’s bank reserve requirements, but they did not go as far as hiking rates or tightening monetary policy despite economic circumstances.

Our team does not anticipate a contagion or spreading of financial instability from Turkey or any of the few countries facing turmoil in the current environment. However, we have slightly downgraded our outlook for developing markets in recent weeks, as volatility increases and global economic and geopolitical conditions become less favorable for that asset class. Still, domestic investors are coming off the best earnings season on record for S&P 500 companies, according to Bloomberg’s record of positive earnings surprises, including sales growth of over 10% and earnings growth over 25%. However, Wall Street’s estimates for next quarter are lower in both sales and profits, due to some supportive economic trends falling to the wayside. Currently, we believe financial markets remain in position for modest gains over the near term.

Chart showing various market returns as of 8/14/18
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