UBS Asset Management has no exposure to Turkey across its global emerging market equities strategies for over three years now.
Citywire AA-rated Geoffrey Wong, who heads the company’s emerging markets and Asian equities, said Turkey has been red-flagged on its macro risk monitoring tool for two key reasons.
First, Turkey has an extreme level of external vulnerability given its high, short-term external debt, low foreign exchange (FX) reserves and twin deficits.
These conditions make it difficult for Turkey to cope with US dollar strength and a stronger oil price.
Second, Turkey has a low policy credibility. President Erdogan has consolidated all powers in the country, and interfered with the independence of the Central Bank, which has failed to raise interest rates to stop ramping inflation pressure.
In addition to Tukey, Wong also noted that South Africa is quite weak from an external standpoint and the manager has limited domestic exposure to the country in its funds.
Although the risk-off sentiment has affected the broad emerging markets (EM) universe, Wong said UBS AM does not expect a full-blown FX crisis in EM.
UBS AM said in its latest investment note that its asset allocation team view events in Turkey as idiosyncratic.
‘While EM currency sell-offs can lead to vicious circles, we do not see this happening this time,’ it said.
Although EM assets could be volatile in the short-term, UBS AM said its asset allocation team does not see strong arguments for long-term investors to abandon EM exposure.
‘We do not believe that the upcycle that started in 2016 for emerging markets is broken and that the recent selloff marks the beginning of another prolonged period of EM weakness,’ Wong said.
With few exceptions like Turkey or Argentina, EM economies are generally healthier than during previous episodes of stress.
At the macro level, EM economies have stronger fundamentals with more balanced current accounts, relatively competitive exchange rates, less FX debt with localised exceptions, and replenished FX reserves.
On the micro level, levels of corporate indebtedness are also at a much lower level compared to the past.