EM – No Turkish contagion

In Short

In our view, the recent significant depreciation of the TRY and the uncertainties related to the future monetary policy should have limited and manageable impacts on global EM assets. Indeed, the CBRT has kept cutting its policy rate with a 100bp rate cut to 15.00%, and the communiqué leaves the door open for further easing in December.
Market Commentary

Highlights:

  • Turkey has been back at the forefront of EM concerns as the TRY has been depreciating rapidly. The pace of depreciation has accelerated after the last CBRT rate cut, and risks are skewed for more TRY depreciation.
  • Like in Q121, we expect the Turkish developments to have a limited impact on other EMs countries and EM assets. Risks have been well flagged, and investors' positioning is close to lows.
  • If any contagion, the channel could be via portfolio adjustments. It would be temporary and limited. EMEA FX yielders would be the most vulnerable.
  • We do not see value in Turkish assets yet. The main difference from previous market stress episodes is the limited push-back from authorities. There is a clear will for a weaker FX.
  • The sovereign is not the most vulnerable link. However, the situation is still fluid, and we keep our negative view on Turkish sovereign credit before reassessing our position. The market reaction should be more limited than on March 21.

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