Turkey’s stock and currency volatility soar as crisis mounts

Volatility in Turkey’s equity and currency markets was starting to climb before last week. Axioma’s risk models picked up an increase in the volatility of the Turkish stock market and its currency starting in April of this year, and reflected peaks in both as the Turkish crisis intensified last week. Turkey’s risk had already begun to rise in the first half of 2018, as global investors backed away from emerging markets and as the Turkish lira weakened against the US dollar. Political turmoil added to Turkey’s volatility, which climbed higher following the re-election of the Turkish president at the end of June. The conflict with the US drove Turkey’s volatility even higher, with President Trump threatened a doubling of tariffs on Turkish steel and aluminum last week. At the same time, the Turkish lira plummeted to its lowest level ever on Friday, establishing more solidly its position as the riskiest among developed and emerging currencies.

Turkish stocks plunged 15.6% over the past six months, driving market risk up about 700 basis points during this period. At 22.5% volatility, Turkey distanced itself as the riskiest country among both emerging and developed markets. The country has not seen this level of risk since 2016 (when risk for other markets was also higher than it is now), as estimated by Axioma’s short-horizon fundamental Worldwide model. This is well above the 18-year median of 18%.

From an “extra-market” perspective, Turkey’s risk has risen 2.7 percentage points since the Turkish presidential elections at June end, about 8 percentage points year to date, and 16 percentage points from the two-decade low of 8% reached in July 2017, as measured by Axioma’s Worldwide short-horizon fundamental model. Note that this measure of risk is over-and-above that of global markets and other factors comprising the Worldwide Markets model, or what we often call “extra-market” risk.

Turkey’s extra-market risk of 23.7% last Friday was 7.2 percentage points higher than the long-term median of 16.5%. However, this level of risk was still lower than the peaks around the Global Financial Crisis (33%) or 2001 Turkish Economic Crisis (73%).

As the lira sunk to its lowest level ever against the greenback on Friday, its risk rose 655 basis points on Friday alone and close to a total of 800 basis points over the past week, pushing the Turkish currency’s volatility above 26%. This level of currency risk is similar to those seen during the global financial crisis.

The contagious effect of the lira’s collapse on emerging markets, and the escalating tensions between the US and Turkey, may very well send the volatility of the Turkish market and its currency even higher. Investors with exposure to emerging markets, and Turkish stocks in particular, may see sharp increases in their portfolios’ volatility (or lower if they hold an underweight position), which could require abrupt rebalancing. To monitor the state of Turkey’s market and currency risk, check out Axioma’s Emerging Markets Equity Monitor available daily here.

Diana R. Rudean, PhD

As a member of Axioma's Applied Research Team, Diana R. Rudean generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Her research helps clients and prospects better understand and adapt to the evolving risk environment.