If you read our latest edition of Forward Observer, you will know that we have officially called out Fed Chairwoman Janet Yellen on any possibility of a significant US interest rate rise in the near future. The supposed imminence of higher rates is primarily why traders have sold off emerging market (EM) assets so aggressively this past year. EM currencies have depreciated as much as 40 percent against the dollar (the Brazilian real, the world’s worst this year) and some equity markets have fallen even further.
Now it seems that other investors are piling into the position of further Fed dovishness. On 2 November analysts at Blackrock, the world’s largest fund manager, made targeted bullish calls on selected markets — particularly equities in Turkey and Thailand, and fixed income in Indonesia. In response, the MSCI iShares Turkey ETF (owned by Blackrock, natch) increased 9 percent while its Thai counterpart rallied 3 percent.
Though the analysts have cited “improved fundamentals” as the reason behind their positive outlook on Turkey, the root cause is almost certainly the surprise result in last week’s presidential elections. President Reccip Tayyap Erdogan and his Islamist AK Party scored a convincing win and gained a parliamentary majority that was higher than almost anyone expected, and have returned the country to one-party rule. Erdogan has been widely criticized for increasing authoritarianism, a trend that shows no sign of abating after his government arrested 35 supporters of a prominent critic yesterday during dawn house raids. While his win may spell trouble for political and press freedoms, it also reduces uncertainty – a siren song for long-only traders.