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What Does the Turkish Lira Crisis Actually Mean for Investors?

Dana Blankenhorn

Turkey’s GDP in 2016 was $857 billion. It will likely be lower in 2018. The market cap of Alphabet (NASDAQ:GOOGL) is currently $856 billion, and could be higher when you read this.

So why did the “Turkish lira crisis” hit global markets so hard?

If you hold assets in the Turkish Lira, they’re worth 40% less today than they were a week ago. Investors and tourists are finding it hard to get foreign currency. Bitcoin traders are rushing in to try and plug the foreign exchange gap.

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What is worrying people who are paid to worry is that the problems in Turkey could spread to emerging markets around the world.

Personally, I think that the Turkish crisis is about the possible effect on emerging markets, but it’s also a sign of what’s to come for the world’s most influential markets as the Trump Administration continues.

The Saudi-American Axis

From a geopolitical perspective, the Trump Administration seems determined to create an “Arab NATO” led by the House of Saud.

The aim is to sink Turkey and Iran, which Saudi Arabia calls a “triangle of evil,” alongside jihadists like ISIS. The Iranian Rial has also crashed and traded at 42,105 to the dollar on August 15. Most reporting on all this is about Turkey’s relations with the U.S. — and Turkey’s President Erdogan’s claims that the U.S. is seeking to “stab it in the back” — but Saudi interests seem to be equally in play. Last week, the Trump administration announced plans to increase tariffs against Turkey.

Let us also look at the Saudi fight with Canada. It’s more related to this than it appears. The U.S. has said nothing to defend Canada, apparently finding the oil kingdom a more important ally than its nearest neighbor. The message is that the Sauds won’t stand criticism and the Trump Administration has its back.

And the situation in Turkey is another example of the U.S. on the side of Saudi Arabia over a fellow NATO member.

The Sauds’ July cut in oil production also keeps oil prices high, something U.S. frackers benefit from. For those accustomed to seeing the U.S. as an “honest broker” in the Middle East, this sudden taking of sides is very confusing. And it could have huge implications for the global economy.

What Can Turkey Do?

In response, Turkey has slapped tariffs on U.S. goods, tried to restrict trade in the Lira to support the currency, and sought support from both Europe and China. So far the people of Turkey seem to support the Turkish government.

European interest in supporting Turkey is based on the fact that its banks are exposed to the crisis, especially those in Spain, with Banco Bilbao Vizcaya Argentaria (NYSE:BBVA) down by one-third so far this year, and 15% just in August. The Greek economy is also exposed, with almost 7% of its exports going to Turkey. The Global X MSCI Greece ETF (NYSEARCA:GREK) is down almost 20% so far in 2018.

The Turkish policy has also brought out bargain hunters, as the iShares MSCI Turkey ETF (NYSEARCA:TUR), which tracks the country’s economy, saw $90.4 million in new investment on August 14. For now the government’s actions appear to have averted panic.

What the Turkish Lira Crisis Means

The fall of the Turkish lira could spread to other emerging markets, and it could affect the countries most invested in its economic success (Spain and Greece). But the causes of the crisis, and the U.S. reaction are a sign of what’s to come.

Global alliances are shifting as the Trump Administration seeks a breakthrough in the Middle East, preferring dictatorships that maintain stability to principles like democracy or human rights.

These are the early innings of a long game, and so far, U.S. investors are winning. But that may not remain the case. Investors need to be clear eyed about the shifting international sands and be prepared to protect their capital ahead of their principles.

Dana Blankenhorn is a financial and technology journalist. He is the author of the new historical mystery romance The Reluctant Detective Travels in Time, available at the Amazon Kindle store (and soon in paperback). Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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