created a short list of emerging currencies that currently
offer high interest rates (near or over 10%). The list includes
Argentina, Brazil, Indonesia, Pakistan, Russia, Turkey and
Venezuela. I also mentioned that I just invested 5% of my
liquid portfolio in the Turkish lira (called the TRY).
However last week the TRY reached its lowest
level ever and Jyske Bank warned that it may weaken further.
Looks like my investment is taking a Turkish Bath! So it
may seem odd that I am thinking about investing more. Here’s
First, let’s look at the bad points
of investing in any emerging currency now. This is a time
of turmoil for all emerging currencies. Turkey has been hit
especially hard, but any investor who gets in any emerging
currency right now may see their investment drop.
The lira really dropped, 16% this month
(versus the euro). Turkish equities fell 27.7% in US dollar
terms since peaking March 1, 2006.
There are numerous short term reasons for
this fall, political tension between the conservative (and
moderately Islamic) government and the secular state apparatus
headed by the president being one. Bad timing on the part
of Turkish central bank was not great either. They lowered
interest rates and said inflation was expected to drop, just
before inflation showed a strong rise in April.
Plus there has been a growing current-account
deficit. Oil-price rises pushed up the deficit by 1.8% of
GDP to 6.3%.
All this has come together just as there
was rising volatility in all emerging currency markets. Investors
are worried that there will be further money tightening and
increased interest rates in the US and Japan. This will make
it harder to borrow dollars and yen to invest in emerging
currencies. The tighter money could also slow economics in
the West and thus reduce exports from the emerging countries.
Now the good. First, emerging countries
are not going to disappear. The West cannot afford to let
the people of the world get poorer any longer. The emergence
of the third world is the driving force of the global economy
now (not the building of the US). The struggle between the
rich and the poor is now one of mankind’s greatest
Second, look at Turkey’s economic
Compare GDP growth and reserves among the
high interest rate emerging currencies.
||GDP Growth Billions
Turkey is solid, number two (or three) in
This means that this economic Turkish bath
creates opportunity. We have a crash in the face of economic
indicators that look good.
This is enough to make savvy investors start
to drool, but we can also count on convergence. Turkey wants
to join the European Union which means that it must over
a period of time get its economic fundamentals to converge
with those of the EU. This is not going to happen overnight.
There will be ups and downs in the process. There will be
worries that Turkey won’t join the EU at all. But I
am betting they will.
Turkey has already embarked and continues
with considerable economic reform towards this goal. The
country still has good growth resulting from real (not government
induced) private demand and investment.
Turkey’s international reserves correspond
to 30.5% of the country’s total debt and there is a
high foreign direct investment that is this year expected
to cover more than 35% of the current-account deficit this
The share of public debt denominated in
foreign currencies has been reduced from 35.6% in 2001 to
14.9% in 2005.
Turkey is facing major challenges, but despite
the recent weakening, the country is still the most interesting
convergence case in Eastern.
Turkey and the IMF completed negotiations
on the review of the reform process which is a condition
for further support from the fund. Under the agreement, Turkey
has been guaranteed a loan worth USD 1.9bn in July but in
return the country must tighten government spending by USD
3bn (approx. 0.8% of GDP) in this budget year. The savings
are to ensure that Turkey keeps the fiscal policy on the
All emerging markets are dropping at the
moment. My speculation in the TRY is that the correction
is overdone and Turkey especially is overdone.
Turkey’s economic fundamentals and
the overall importance of emerging markets leads me to believe
that buying now will lead to extra profits.
There is one other factor that I especially
like about Turkey and why I believe it will be brought into
the EU. This factor led me to recommend Turkey as a place
to invest nearly 20 years ago, well before its market exploded
One of the other huge challenges of mankind
is resolving differences between Christianity and Islam.
Turkey is at the crossroads of this conflict, half Arabic
and half European in many ways. Turkey has developed a social
structure that the Western World desires to evolve, a Moslem
country with a secular government and capitalistic democracy.
The West cannot let turkey fail.
Add this all together and the dropping TRY
seems like an opportunity to me, especially since I get paid
13+% to take the risk.
But then I have been investing globally
for decades. Keep in mind this is still only 5% of my portfolio,
an amount I could easily afford to lose. Turkey is not a
place for everyone to invest and especially right now. Those
who invest there now may see their investment drop so be
prepared for this if you do. In the end though my guess is
they will find that themselves bathing in profit.
On the subject of currencies a reader recently
“Mr. Scott, First, let me say how
much I enjoy reading your e-mails and appreciate the tremendous
amount of effort you have made to share your knowledge with
anyone who is interested. I hope doing this has been rewarding
to you as well - I suspect it has.
“I have been reading your e-mails
for about 4 months now and while I have invested in US equities
and International Mutual Funds, I have never invested in
currencies, except for money market and certificates of deposit
in my IRA (Vanguard/Fidelity) and my local bank. In other
words, I have no experience with currencies. How can we invest
in emerging currencies? I'm not interested in a specific
currency per se, just how a guy in Tulsa, Oklahoma with three
kids would go about making such investments. Thanks again
for your time, both in your response and in the information
you so generously provide.”
My reply can help many realize that they
already invest in currencies and just do not realize this
because your mutual funds are denominated in US dollars.
Thanks for getting in touch. You are invested
in currencies if you are invested in International Mutual
Funds. If, for a theoretical example, you have a dollar denominated
Vanguard Fund that invests in international markets and that
fund is invested in Germany, England and China, then you
are invested in euro, pounds and yuan.
If the dollar falls versus these currencies
the dollar value per unit of the fund will rise equal to
the US dollar’s fall.
For many investors this is the best way
to invest in other currencies, and you can use our daily
messages to get a feel for what is going on. Then watch what
investments are in the funds you hold. This will give you
the ability to choose funds more accurately. Regards, Gary
Enhance your profit potential with a diversified
portfolio of emerging currencies through a MultiCurrency
Learn about investing in emerging
currencies, gold, silver, Ecuador, import-export, overseas
markets and more. Join Merri and me at our September 15-16-17,
2006 International Business and Investing Made EZ course
in North Carolina. Review where to invest and do business
now and learn which markets and currencies may be strong
in the year ahead. Our May course was overbooked and the
September session is already filling up fast. Our free
accommodations are reserved on a first come first served
basis so do not delay! Go to www.garyascott.com/catalog/ibeznc.html