The lira, the world’s worst performer this year, and South Africa’s rand led the advance as some investors say Turkey’s problems are unique and others look for buying opportunities across emerging markets, writes Bloomberg.
The rand was nearly 2.5% stronger in morning trade against the dollar on Tuesday, after sliding as much as 9.4% on Monday – the most since October 2008.
Bloomberg reported some analysts saying that there are few fundamental reasons for assets across emerging markets to fall because of the lira. Turkey’s problems stem from president Recep Tayyip Erdogan’s standoff with the US administration.
With average inflation rates at record lows and current-account balances improving, the developing world is diverging from Turkey. Still, the sell-off has helped make valuations attractive, Bloomberg said. An index of emerging-market stocks is near the cheapest since early 2016, before a two-year rally started.
“After a large sell-off triggered by the rout in Turkey, some investors may have bought emerging currencies on dips,” said Toru Nishihama, Tokyo-based emerging-market economist at Dai-ichi Life Research Institute Inc.
“The global economy is still expanding and that’s providing underlying support for the emerging markets. But Turkey’s problems from its spat with the US, issues of central bank independence and inflationary pressures are not resolved, which means downward pressure on Turkish assets will continue for a while.”
“Concerns will linger over who could be the next hit. Would that be South Africa because of its weak fundamentals or Russia with deteriorating relations with the US or Mexico where the peso has been purchased on expectations surrounding the new president but no concrete outcome has been delivered?” Nishihama said.
The rand’s performance
According to analysis by Rand Merchant Bank, markets are still digesting their exposure to the Turkish crisis as the lira steadied in Asian trade.
“Turkey’s reliance on foreign funding, as evidenced by its wide current account deficit and its corporates’ exposure to foreign currency debt, renders it vulnerable to higher global yields and a stronger dollar,” the group said.
Contagion from the Turkey crisis prompted intervention from central banks in several countries including Indonesia and Argentina.
While South Africa is also heavily reliant on foreign inflows, the South African Reserve Bank confirmed that intervention would not be necessary in the local market.
“We expect the rand will continue to pull back, and have not changed our minds that the year-end range is between R13 and R14,” RMB said.
RMB said that the slipping rand implies that it has pushed weaker than its long-term PPP (purchasing power parity) fair value.
“Interestingly, rand valuation on the PPP scale implies the currency is close to the value of other high risk currencies measured on the same basis,” RMB said.
The rand outperformance at the start of the year has been worked away, the financial services firm said.
Hugo Pienaar, senior economist at the Bureau for Economic Research, said on Twitter that while there is “lots to worry about in SA”, the rand crash was driven by Turkey woes and strong US dollar, and was likely an over-reaction by the market.
Reserve Bank’s view
Bloomberg reported that the [...]