Cold Turkey

It seems that investors are investing more on the basis of perceptions, rather than on facts. Turkey (the country, not the bird) is a case in point. Emerging markets hold a lot of investors capital, but as the article explains, there are many dangers. So, before the turbulenece shifts into a hurricane, it is perhaps a good idea to end your investments in the emerging markets, and switch over to other types of investments.

Turkey may have been helped by the perception that, because many emerging markets have improved their economic positions, all of them are less risky. Emerging-market bond spreads (the excess rate over Treasury-bond yields) reached a record low of around one-and-a-half percentage points in June. When investors were only getting 6% for lending money to investment backwaters such as Peru, a 6.7% yield from Turkey must have looked like a bargain.

But it is in the nature of emerging markets that, every so often, they kick investors in the teeth. This looks like being one of those moments. Of course, within 12 months, investors are bound to be back, their smiles expensively restored. Fast economic growth and high yields are just too alluring.