Argentina's benchmark Merval equity index collapsed late last week as the currency depreciated over 20% overnight. Stocks were down nearly 50% before rebounding slightly. This market failure has set off worry around the world as to how far this contagion will spread and how best to contain it. Hong Kong itself appears to be imploding with protesting picking up serious steam. Trade wars are in full swing and uncertainty is everywhere; what is an investor to do?
My senior project in a finance class I was taking in college predicted the collapse of the pegged currency regime that the Argentines were using in the late nineties and early 00s. I had studied currency pegs in all of their varieties in 2001 soon after Turkey's moving peg was also abandoned. My findings and prediction: currency pegs never last. Even those that are easiest to maintain, oil-exporting countries flooded with petrodollars, ultimately fail. Argentina's peg was abandoned, and I did well in the class, but that set Argentina back at least a decade. Fast-forward 17 years, and Argentina again is witnessing a major economic crisis.
The Hong Kong protests that began peacefully have turned violent. Protesters handcuffed at least one journalist they accused of being a spy and shut down the main international airport, a global hub. This set off worries that the protests will be protracted and that Mainland China will respond by sending in troops to help Hong Kong authorities – worries that President Donald Trump himself tweeted this week. I rarely believe that these types of market-moving exogenous shocks to economies happen in a vacuum. Are the protesters just regular Hong Kong residents upset about the proposed extradition treaty with China or has the movement been hijacked by others with a vested interested in asset flight from Hong Kong? As Hong Kong's losses increase and those that are betting against China's autonomous region accumulate more gains, I become more skeptical.
So – investing advice? Will this contagion spread? Will Argentina's failure cause other emerging markets to fail? Will Hong Kong's protests continue until China is forced to step in? Where should I park my assets in the meantime? These are the most common questions I get, and my answers are almost always the same. Invest in investability. If a country or region has great fundamentals and positive demographics, you should be good for the long haul. Will people want to live here in 50 years time? If the country has bet everything it has on natural resources, will investors stick around after those resources have been depleted?
In the case of Turkey, well Turkey is very lucky. A central location between three continents, a temperate climate, plenty of access to water, and strong demographics make Turkey a long-term investment magnet. It passes the "would I want to live there test" for me and that's important. As developed markets trip over lack of growth and negative demographics, emerging markets will attract investments. Common sense investment decisions will lead to long-term gains. Don't worry about Argentina; it'll recover, as it did from 2002, and investors will return. Invest in investability.