Turkey, Egypt Defy Emerging Markets’ Worst August in Years

Turkey and Egypt have gone from underdogs to star performers as emerging-market stocks endured the worst August since 2015.

(Bloomberg) — Turkey and Egypt have gone from underdogs to star performers as emerging-market stocks endured the worst August since 2015.

Stocks traded in Istanbul and Cairo are the biggest gainers among peers in the month, defying a 6% slump across emerging markets. The nations’ policy resets and buying by local investors seeking to hedge against surging inflation helped shield their markets from the fallout of China’s mounting economic problems and a Federal Reserve that says it’s prepared to keep raising interest rates.

It’s a sharp turnaround from the first seven months of the year, when Turkish and Egyptian stocks posted some of the biggest dollar-based losses in emerging markets. 

“A stuttering correction to policies in markets like Egypt and Turkey, but also, further afield, Nigeria and Pakistan, has brought them back on to the radar of investors still nursing the scars of years of devaluation or trapped capital,” said Hasnain Malik, a strategist at Tellimer in Dubai. “Expectations are so low that any sign of serious improvement merits attention.”

Even as these once-untouchable markets regain their luster, the mood elsewhere is grim. Developing-currencies have slid 1.5% since end-July, heading for their worst August since 2019. The average cost of borrowing in dollars for emerging countries has jumped by 34 basis points in August.

In Turkey, President Recep Tayyip Erdogan has signaled he’ll give his new finance minister and central bank governor some leeway for a shift away from unorthodox policies — including ultra-low borrowing costs — after his election win in May. The central bank hiked interest rates by 7.5 percentage points this month, far more than expected, fueling a rally in the nation’s stocks, currency and bonds.

Meanwhile, inflation running at near 50% annually and the lira’s volatility have prompted local investors to park savings in stocks. Equities reflect nominal profits and as long as companies are able to pass on high inflation to customers, stock values incorporate the effect of higher consumer prices. That can make equities attractive for investors looking to minimize the erosion in their savings.

The benchmark Borsa Istanbul 100 Index has jumped 45% in local-currency terms this year and little changed in dollar terms because of the 30% meltdown in the lira. The stock gauge trades at about 10 times the projected earnings of its members. Valuation gains began in late May when it was trading at below 5 times, one of the cheapest in the world. 

Egypt’s equities benchmark has climbed 29% this year in the local currency, but is only 3% higher in dollar terms following the pound’s devaluation in January, after which the pound has traded relatively flat. The International Monetary Fund has said it’s waiting to see privatization deals for state assets and genuine flexibility in Egypt’s currency before carrying out the first review of a $3 billion rescue program.

As the country grapples with record inflation and the worst foreign-currency crunch in years, foreign investors are bracing for another steep decline in the pound and staying away. But for locals, the stock market is a refuge from inflation running at 37%.

Elsewhere, Argentina’s Merval stock index has leaped 48% this month as investors, trapped in the local market by currency controls, look to hedge against rampant inflation following a devaluation. That’s the index’s best monthly performance since 2002.

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Stocks in Budapest are the third-best performers in emerging markets this month. At 5.9-times expected earnings, they remain cheaper than most peers in the region, including Bucharest and Prague.

Hungary’s economy faces a myriad of challenges such as an ongoing recession, a record year-to-date budget shortfall and the European Union’s highest inflation rate and borrowing costs. Prime Minister Viktor Orban has also failed to unlock crucial EU funds, which are suspended due to graft and rule-of-law concerns.

Hungary can hold its own as long as the external environment doesn’t turn for the worse, said Eszter Lokietek, a fund manager at the country’s largest lender, OTP Bank. But if the mood turns bad, the negatives will immediately come to the fore and major stocks will be hit, she said. 

Combined, the weightings of Turkey, Egypt and Hungary account for about 1% of the MSCI Emerging Markets Index. That means investors would have to deviate from the benchmark allocations to benefit from their outperformance.

“Turkey, Egypt and Hungary are so tiny in MSCI EM indexes that most investors will have zero exposure to them,” said Charlie Robertson, head of macro strategy at FIM Partners UK Ltd. in London. “That only hurts when you get a significant market rally, as we’ve seen in Turkey.”

–With assistance from Veronika Gulyas.

(Updates prices starting in second paragraph)

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