Let's Talk Turkey - You May Have Bigger Fish to Fry than the Lira

There’s no doubt that Turkey has dominated the headlines in recent weeks. And, title of this blog notwithstanding, we don’t make light of the topic. It’s serious for a country and its populace when its economy gets into the type of precarious situation in which Turkey currently finds itself, and to the extent that market contagion can sometimes spread to other countries, we are certainly keeping a close eye on the situation. However, it’s also important to be able to discern between the extent of a sell-off, and its potential impact on U.S. investors.

In the case of Turkey, it’s key to remember that, for U.S. investors who access their emerging market (EM) exposures through a broad basket, the country is likely to account for only a small proportion of their investment. Indeed, its weight in the MSCI Emerging Market index is only around 50 basis points currently, making it almost an afterthought compared to the top ten countries that account for around 90% of the index (the smallest of which is Malaysia at around 2.33% of the index) as of 8/27/18.

Of course, if a U.S. investor accesses the emerging markets on an unhedged basis, then they are long not only the stocks of these countries, but also the currencies. And, if it has been a rough year so far for emerging market equities, it has also been pretty bad for their currencies too.

Figure One shows the details, listing all the countries and currency hedges, and their weights, held by one of our currency hedged EM exchange traded funds (ETFs), (note, these hedge weights will differ slightly due to a monthly foreign exchange (FX) hedge frequency). Also shown are the year-to-date currency returns versus the U.S. dollar, and their “Impact.”

Figure One: Countries and currency hedges and weights, held by one of our currency hedged EM ETFs (weights as at 08/23/18, returns versus the U.S. Dollar Year-to-date)
Currency Weight YTD Return Impact
Hong Kong Dollar 25.8% -0.4% -0.11%
Korean Won 15.5% -3.9% -0.60%
Taiwanese Dollar 13.2% -3.3% -0.43%
Indian Rupee 10.0% -8.8% -0.89%
South African Rand 6.7% -13.5% -0.91%
Brazilian Real 6.5% -19.2% -1.25%
Russian Ruble 3.6% -14.4% -0.52%
Mexican Peso 3.4% 4.2% 0.14%
Malaysian Ringgit 2.6% -1.3% -0.03%
Thai Baht 2.6% 0.0% 0.00%
Indonesian Rupiah 2.1% -7.2% -0.15%
Polish Zloty 1.3% -5.5% -0.07%
Chilean Peso 1.2% -6.9% -0.08%
Philippine Peso 1.1% -6.6% -0.07%
Qatari Riyal 1.0% 0.0% 0.00%
UAE Dirham 0.7% 0.0% 0.00%
Turkish Lira 0.7% -38.8% -0.26%
Colombian Peso 0.5% 0.9% 0.00%
Chinese Renminbi 0.4% -4.3% -0.02%
Greek Euro 0.4% -3.3% -0.01%
Hungarian Forint 0.3% -7.3% -0.02%
Czech Koruna 0.2% -4.1% -0.01%
Egyptian Pound 0.1% -0.8% 0.00%
Total 100.00% -5.31%
Source: DWS FactSet, Bloomberg as of 8/23/18. Past performance may not be indicative of future results.


What is this last metric, “Impact”? Well, it’s one that we find helpful in understanding what have been the main drivers of performance between currency hedged, and un-hedged performance year-to-date. Allow us to explain. So far in 2018, the unhedged emerging market index is down -7.73%. That represents the sell-off both in stocks and currencies that a U.S. investor could have been exposed to. However, they also had the option to hedge out that EM currency exposure, and, had they done so, they would be down by less, -2.95% so far over the same period (YTD).