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In an article, ‘What should investors do in Turkey’s crisis?’, whitten by Hou Wey Fook, CFA Chief Investment Officer and Jason Low, CFA Strategist at  DBS Bank Ltd. (“DBS Bank”), it has been noted that the turmoil in Turkey could stoke a contagion and bring about a crisis of confidence in other weaker EM economies.  

Key Quotes:

“We have already seen similar episodes in Argentina and Brazil in the past few months. Further, the ruble has weakened substantially after the US imposed new sanctions on Russia.”

“n terms of investment strategy, we stay Neutral on equities. Within the asset class, we continue to Overweight on the US given strong domestic fundamentals which are least impacted by the EM/Turkey turmoil. In fact, US equities tend to attract flight-to-safety flows in volatile times.”

“We continue to Underweight Europe equities on the back of this latest Turkish crisis, given: i) Turkey is Europe’s sixth-largest trading partner, accounting for 4.1% of the European Union’s total trade in 2017 and ii) Europe’s financial sector has a notable exposure to Turkey, especially for Spanish and French lenders. In fact, the European Central Bank is concerned that these financial firms are not hedged against the lira’s depreciation and could begin to default on foreign-currency loans, which make up 40% of Turkish banking-sector assets.”

“While non-performing loans in Turkey’s banking sector remain low at 3%, ratings agency Moody’s has warned that bad debt is expected to rise as the crisis worsens. Recall that Europe’s financial sector has the largest weighting on the MSCI Europe Index, at 19.4%.”

“Even though Asia’s exposure to Turkey is not high, we are cognisant of the risk of capital outflow from redemptions out of global Emerging-market funds. We stay Neutral on Asia. Investors are advised to stick with stronger Asian economies with firm external balance sheets and fiscal balances like China and Singapore. In such volatile times, a dividend-based strategy in Asia will also prove to be resilient.”

“Within bonds, US Treasury yields will likely be capped from flight-to-safety flows. Investors should continue to engage in BBB/BB corporate bonds for superior returns over cash and government bonds.”