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| Image from NY Times |
"There are various campaigns being carried out. Don't heed them," >Erdogan said Thursday "Don't forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now," Erdogan told supporters.
A few moment later, Donald Trump tweeted.
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!— Donald J. Trump (@realDonaldTrump) August 10, 2018
This chart shows the progress of the Turkish Lira in response to the Tweet.
It is a strange new world whereby Trade Wars are declared on Twitter and the financial markets are reacting to every move by the tweets from world leaders.
What are the Implications
We have seen similar episodes of Emerging Market hiccups from the 1997 Asian Currency Crisis where the origins started from Russia and the 2013 "Taper Tantrum" where the tapering of the US Quantitative Easing shocked the Emerging Market, leading a short lived crash of stock markets around Asia and Emerging Markets. This is a similar scenario, though the situation is quite similar yet different since 2013.
The interest rate environment was pretty similar than and now: The USD and US interest rising and Emerging Markets that has borrowed heavily in USD (such as Turkey) saw their currencies and stock markets hammered by investors. The big difference this time round is that we have Donald Trump who is declaring a global trade war which aggravated the situation depressing the markets which he is targeting. It also does not help that relationship between US and Turkey has been declining over years as Turkey has been gravitating towards Russia's sphere of influence. On the bright side, it is unlikely that Donald Trump will target South East Asia nations which are also vulnerable and countries which was hit badly in the last Taper Tantrum such as Malaysia and Indonesia has shored up on their foreign reserves in preparation for a rising US interest rate.
Having said that, the key concern is again on the issue of contagion. EU banks are one of the largest creditors to Turkey and their recent recovery from the EU financial crisis haven't put them on the best of condition as this moment in time. The trade war between US and China also increase the concern that a China slow-down will hit other South East Asian countries, on top of a rising USD and interest rate. It is like the perfect storm of combining the "Taper Tantrum" of 2013 and the "China Stock Market Crash" of 2015. If China and our neighbours get into trouble, Singapore will not be spared either.
The question is: Will the financial defense hold out to weather this series of storms? It is a development that investors will need to pay close attention to.
Portfolio Strategy
The portfolio has weathered the Emerging Market crisis well with our USD and US position gaining ground and pushing the portfolio to a positive return, despite the problems in Asia and Turkey. The current portfolio is working well to weather the majority of the financial shocks that have been thrown at us.
However, you should have receive notice that First State Global Resource will be closing down and we are looking to replace that fund with a new one. However, there is no suitable replacement in the CPFIS category and hence I am looking to reallocate First State Global Resource into an Emerging Market fund which has similar correlation with commodities and with the recent Emerging Market corrections, it seems like a good value buy at this moment in time.
For the cash , I am looking at JPMorgan Funds – Global Natural Resources to replace First State Global Resource Fund.
I will continue to monitor the situation in Emerging Market and will adjust the portfolio if there are opportunities to buy into opportunities.
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