The importance of the emerging markets

The moment for emerging markets has arrived, as I quoted in my article ''A little bit of everything''. We should not be surprised when we read the press in the morning and on the cover of the newspaper it appears that the currency of an emerging country plunges to historical low levels. Do not take it as a breaking new please, because it is a situation that is going to continue for a long period of time and it is something that I can assure with certainty since the European Central Bank has not yet begun to normalize its monetary policy (those who read me often already know that I disagree with extending the QE to where the ECB has done it).

Countries like Argentina and Turkey will continue to suffer, and I am afraid that the measures proposed by Turkish Treasury and Finance Minister Berat Albayrak in İstanbul, August 10, 2018 will NOT be enough to recover the Turkish economy and the confidence of the financial markets. Because the problem of the Turkish economy is not external, as some say, the problem of the Turkish economy, as in Argentina or Brazil, is INTERNAL. Many of these emerging countries are not doing their homework and the solution to their problems lies WITHIN these countries.

We can not wait for someone from outside to tell us how we have to organize our house, but in the last case that may be our only solution if we want to get out of this chaos. Let’s see how it works between Argentina and the International Monetary Fund. However, the real solution lies in generating internal economic stimulus, but why economic stimulus?

Emerging markets have always served as refuge for investors in times when interest rates are very low or even negative in developed markets (like in the last financial crisis). This is due to the fact that in emerging markets investors are able to extract juicy profits that in more developed markets would not be able to have due to low rates. So what happens is that when interest rates rise again in developed markets, investors again have incentives to repatriate capital to developed markets.

What is happening now in emerging markets is a flight of capital that is not being ordered due to political and financial instability. That is why I said earlier that what emerging markets such as Turkey or Argentina need is to create incentives to stop the flight of capital. They need stability in order to recover market confidence.

However, nowadays they do not have the necessary conditions to compete against the more developed ones such as the American economy where interest rates are finally beginning to be normalized by the Fed. The first symptoms of crisis in the Turkish economy: deficit by current account and, of course, and excess of indebtedness with foreign currencies (in this case Dollars and Euros). We must be aware that so far this year the Turkish lira has already depreciated more than 70% against the Euro and I do not think the currency will stop depreciating there unless the previously mentioned problems are solved. By the way, better not to dedicate this article to talk about the countries that are more exposed to this debt (Spain, Italy or France).

Do not laugh when I tell you that Turkey's credit bubble may pop sooner than expected, so I encourage you to look if you do not believe me, take the data and have a quick look. Later I invite you to take a tour around Turkey and open your eyes, visit buildings, see the immense amount of houses that are being built, ask for prices, think about how many of those average people are going to be able to pay for their house within the established deadlines in these economic conditions and finally, ~you~ value the situation yourselves. It is about the simple law of supply and demand my friends.

Everything is going to depend on the geopolitical direction of emerging markets. In this case Turkey is a strategic country for Europe, but in recent years relations have been deteriorated because of what we all know. It has never happened that a NATO country goes bankrupt (and no Greece did not bankrupt in the end because the EU was there...), and I sincerely think that this will not happen to Turkey. What I'm trying to say is that Turkey must decide which direction wants to take, west or east. Turkey is not Argentina, the Turkish economy has enough potential to face the crisis, but what the country does not have right now is political will.

As a wise man said:

‘’Our aim is not to die. It is to carry out the revolution, to make a reality of our ideas. We must live, to get them accepted by the people’’ – Mustafa Kemal Atatürk

Many thought that in the meeting of the Fed in Jackson Hole, the president Jerome Powell was going to stop normalizing monetary policy to bailout bad investments in emerging markets. But of course NO, the American economy needs to continue raising rates so as not to jeopardize its own stability in the case of a new crisis, since macro data supports rate increase.

So imagine what could happen in emerging markets when the Fed and the ECB begin to normalize their policies together. I assure you that things are going to get a lot worse before they get better, but there are still many investment opportunities in emerging markets, especially in Turkey. You just need to be careful, know how to analyze the data and ask the right questions.