Mark Mobius, a well-known emerging market investor, said on Tuesday that Turkey may not be the only country facing a currency crisis, given the prospect of rising US interest rates.
“Yes, of course,” Mobius told CNBC’s “closing clock” in response to a question about whether the sharp depreciation of the Turkish currency lira would spread to other countries.
“As U.S. interest rates rise, all other countries with dollar-denominated debt will be hit,” said the founding partner of the investment firm Mobius Capital Partners.
The Turkish lira fell to a record low on Tuesday, and the country’s President Recep Tayyip Erdogan defended his central bank’s continued controversial rate cut amid double-digit inflation.
Mobius did not specify which other countries are vulnerable to the currency crisis. But he said that the good news is that since the 1997 Asian financial crisis, many emerging markets have borrowed more money in their own currencies.
Currency crisis risk
An analysis released by investment bank Nomura Securities last week found that the four emerging markets most at risk of a currency crisis are Egypt, Romania, Turkey and Sri Lanka.
The analysis considered indicators such as the percentage of foreign debt in GDP, the ratio of foreign exchange reserves to imports, and stock market indexes.
“Looking forward, in the context of a further downturn in China’s economy, the prospects for the Fed to normalize monetary policy are not a particularly good combination. [emerging markets],” Nomura said in last week’s report.
The Fed will begin to slow down its asset purchases this month. Most Fed officials said that they would not consider raising interest rates at least until the end of the reduction, but the market has been looking for a faster timetable for raising interest rates, and the initial rate hike is now priced in June 2022.
Nomura said that emerging markets are facing other challenges at this time, such as expanding fiscal and current account deficits, and rising food prices.
Mobius’ investment options
Mobius said that higher interest rates do not necessarily mean that the market has “slashed sharply.”
The investor said that in an environment of rising interest rates, companies with strong profits and high profit margins will still perform well, adding that India and Taiwan are his two top markets.
As for Turkey, Mobius said that a currency devaluation may lead to better exports from the country.
“The companies we own in Turkey get their revenue in dollars and euros. The Turkish lira is getting lower and lower, and they perform better because their costs are much lower,” he said.
— CNBC’s Natasha Turak, Jeff Cox and Thomas Franck contributed to this report.
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