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Weekly View – “We have our people”

Summary:
The CIO office’s view of the week ahead.Last week, markets were troubled by the dramatic decline of the Turkish lira and the potential for the spread of contagion elsewhere in markets. The lira fell by 12% on Friday and 35% since the start of 2018 against the dollar. Emerging Market (EM) equities fell but overall losses for the week were limited. Elsewhere, the European Central Bank voiced its concern over EU banks’ exposure to Turkish borrowers, sending European banks’ shares and the euro lower as a result.However, reviewing the fundamentals reveals limited cause for alarm over potential contagion. While its financial sector may be exposed to the embattled currency, Turkey accounts for less than 3% of the total EM corporate bond market. Indeed, the EMs that have been penalised by markets

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The CIO office’s view of the week ahead.

Last week, markets were troubled by the dramatic decline of the Turkish lira and the potential for the spread of contagion elsewhere in markets. The lira fell by 12% on Friday and 35% since the start of 2018 against the dollar. Emerging Market (EM) equities fell but overall losses for the week were limited. Elsewhere, the European Central Bank voiced its concern over EU banks’ exposure to Turkish borrowers, sending European banks’ shares and the euro lower as a result.

However, reviewing the fundamentals reveals limited cause for alarm over potential contagion. While its financial sector may be exposed to the embattled currency, Turkey accounts for less than 3% of the total EM corporate bond market. Indeed, the EMs that have been penalised by markets so far are specifically those with the weakest fundamentals, rather than the broader group as a whole. In regard to European banks, share prices of the biggest lenders to Turkey, Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas have declined since Friday. However, Eurozone banks are more financially secure than they were a decade ago, with healthy capital ratios as an outcome of stricter financial requirements in the wake of the financial crisis. Furthermore, even within the most exposed lenders, risk is contained. Spain has by far the highest exposure to Turkish borrowers, but on an ultimate risk basis, most of this is outside of the banking sector. Turkish concerns made the VIX move up on Friday from 11.3 to 13.2 and volatility is an area we continue to monitor.

Tesla also had investors’ attention last week after its CEO Elon Musk tweeted his intention to take the company private. If successful, it would result in the largest privatisation deal by value at over USD 70bn. This is particularly notable because unlike computer maker Dell, which in 2015 was the largest company in terms of revenue to go private, Tesla is not profitable and struggles to breakeven. Such public-to-private deal activity is an indicator of private equity market strength, as reinforced by the solid financial conditions of recent years.

César Pérez Ruiz, Head of Investments & CIO

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