The wind has shifted. While international investors still avoided financial markets in emerging markets this summer and scaled back significant investments, emerging market currencies have been able to stage a noticeable recovery in recent weeks. The South African rand and the Turkish lira have gained a good 4% and almost 19% respectively over the euro since the start of September.
Turkey along with Argentina were at the heart of the emerging market turbulence during the summer months. Growing doubts about the central bank’s independence and concerns about further sanctions being imposed by the US, which would restrict the country’s access to international capital markets, generated considerable uncertainty among investors. Financial markets increasingly factored in a scenario whereby the situation could escalate, bringing about insolvency of many Turkish companies or even of the Turkish state.
The portents of these two central factors driving the crisis have meanwhile turned. The Turkish central bank unexpectedly raised its key interest rate sharply in mid-September. Additionally, US pastor Brunson, whose house arrest in Turkey triggered the escalation of diplomatic tensions, was allowed to return to the USA in mid-October. This was followed by public rhetoric from presidents Trump and Erdogan, with references made again to “two allies” and the “terrific relationship” this could lead to. Not only the lira benefited from these signs of easing. The environment for emerging market currencies has improved significantly overall. This also supported South Africa’s currency. The efforts undertaken by South African president Ramaphosa to make his country more attractive for international investors was overshadowed in recent months by global events. In a generally less turbulent environment on the financial markets, this focus on a solid budget policy and the fight against corruption are likely to be rewarded again to a greater extent.
The issues have not been resolved entirely; after all, South Africa and Turkey are still up against considerable political and economic challenges. However, the portents have improved noticeably in recent times. We find that investments in South African and Turkish government bonds currently represent an attractive opportunity for investors with an appetite for risk. This is largely down to the generous yield the bonds are currently producing and the appropriate compensation these investments offer in return for the attendant uncertainty. Of course, for this generally positive picture to endure, the turbulence of recent months cannot escalate again or for any length of time.