Why are Turkish assets underperforming?

The Turkish Lira hit new lows this week, whereas government bond interest rates were at their highest levels since the global crisis. Weekly statistics released by the Central Bank on Oct. 1 revealed that there were outflows of $1.8 billion and $500 million from bonds and equities until Sept. 23 during the last quarter.

Turkish assets are not alone. According to the Institute of International Finance, emerging market (EM) portfolio outflows during this past quarter were the worst since the global crisis. Consequently, the borrowing costs of EMs have passed 2013 taper tantrum levels, and their equities have been trailing behind developed country counterparts.

However, Turkish assets have been performing even worse. To see why, it is important to note that the negative mood towards EMs is based mainly on growth worries, which could lead to spiraling problems. As the IMF noted in its latest Global Financial Stability Report on Sept. 29, there has been a surge in emerging market corporate debt in the last few years, which could lead to widespread bankruptcies with rising borrowing costs when the Fed begins raising its policy rate.

Likewise, the Turkish PMI manufacturing index, which was released on Oct. 1, fell again in September, signaling a further fall in production. But the future looks even bleaker, as the economy is faced with a confidence crisis: After a consumer confidence index that hit its lowest since the global crisis, real sector confidence fell below the critical 100 threshold in September, according to statistics released on Sept. 28. The broad confidence index, a combination of different indices, is at an all-time low. Business channel BloombergHT?s own confidence index, also...