The emerging market (EM) bloc has seen a lot of upheaval in 2018 with pain in Argentina and Turkey epitomizing the crisis. iShares MSCI Emerging Markets ETF (EEM - Free Report) is down 17.2% this year, while the S&P 500-bsed fund SPDR S&P 500 ETF (SPY - Free Report) has lost 1.7%.
Mainly hurt by the double whammy of a hawkish Fed and trade war fears between the United States and China, EM investing went into a tailspin. A stronger dollar weighed on the EM bloc, especially those with current account deficits. These countries had to resort to a policy tightening in mid-2018 to contain the decline in their respective currencies.
Along with these reasons, double-digit inflation and political woes pushed the Turkey ETF to a nine-year low in Q2. iShares MSCI Turkey ETF (TUR - Free Report) was off about 27.5% in the second quarter and is down 45.1% this year. Meanwhile, the Argentina economy contracted in the second quarter. It was the largest contraction since the last quarter of 2008. Global X MSCI Argentina ETF (ARGT - Free Report) lost about 23.9% in Q2 and is off 29.8% this year (as of Dec 11, 2018) (read: Should These 3 Emerging Country ETFs Fear Fed Rate Hikes?).
Are These Two Country ETFs About to See Good Times?
According to Whitney Baker, the founder of New York-based Totem Macro, which advises funds holding more than $3 trillion in assets, sees Argentina and Turkey stocks rallying in 2019. As the U.S. economy is showing signs of peaking growth and the greenback strength is fading, there are chances that these once-beaten-down riskier emerging markets will perform well in 2019.
Inside the Improvement in Turkish Economy
Things are already better off for Turkey. The country’s finance minister indicated that Turkey's annual inflation rate will decline faster than expected, hitting 15.8% in 2019 and 6% by 2021. This was a meaningful drop-off from 20.72% annual core inflation registered in November 2018. The economy’s current accounts have also been showing signs of improvement, per the finance minister (read: Turkey ETF Tastier on Thanksgiving).
Its currency lira has strengthened 20% against the U.S. dollar since August. A sharp decline in oil prices and moderate gains in the U.S. dollar in the past three months helped the Turkish currency lira to stay steady. Since Turkey’s 90% crude requirements are met by imports, movements in oil price and greenback helped the Turkish market to a great extent (read: Higher Oil Prices to Spell Trouble for These Country ETFs).
If these weren’t enough, amid massive sell-offs in Wall Street at the start of the fourth quarter of 2018, some risk-loving investors turned to beaten-down but high-yielding emerging market economies to cash in on the cheaper valuation. Since TUR yields 4.21% annually, investors find this product lucrative from an income point of view.Turkey ETF was up 16.5% in the past three months.
How Is Argentina Shaping Up?
Argentine lawmakers approved an austerity budget for 2019 in mid-November, cut inflation-adjusted social spending by 35% and hiked debt payments in peso terms by 50% to meet conditions for expanded financing from the International Monetary Fund, per a source. Argentina has been under a bailout package with IMF worth $57.1 billion through 2021.
The budget by the Senate — which was approved earlier by the lower house — projects a 0.5% decline in GDP and a 23% inflation rate by the end of 2019, down from the forecast 44% this year. These budget measures along with investors’ renewed inclination for EM investing should place the Argentinian market in bright spot. The pure-play ETF ARGT has been up 1.2% in the past three months compared with 8.7% decline in the S&P 500 index (see all Frontier Markets ETFs here).
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