The Real Takeaway From Headlines’ Fixation on Turkey

Editors’ Note: MarketMinder does not make individual security recommendations. Those mentioned below merely illustrate a broader theme we wish to highlight.

Here is something of a sign of the times: Today’s biggest financial news story, by far and away, was a rate cut and currency slide in Turkey. A country that is just 0.3% of the MSCI Emerging Markets (EM) Index’s market cap.^[i] This is part of a recent trend we have noticed, in which events of little fundamental significance to global markets get bigtime attention simply because they are new and different. The flipside of this? There is actually precious little in the way of news right now, which we have long found to be a nice backdrop for stocks. In our view, no news is usually good news, giving the market plenty of latitude to do its daily work of pricing in longer-term fundamentals.

We aren’t denying that Turkey’s news is interesting. Today’s cut lowered the benchmark rate from 16.0% to 15.0% despite Turkish inflation clocking in at 19.9% y/y last month.^[ii] Calling the move unorthodox is an understatement. But it also caps President Recep Tayyip Erdogan’s long history of meddling with monetary policy, including firing prior central bank governors who didn’t share his belief that high interest rates cause, rather than tame, inflation. He fired prior central bank governor Naci Agbal in March after a series of rate hikes, replacing him with Sahap Kavcioglu—a former newspaper columnist who espoused monetary views similar to Erdogan’s. Kavcioglu’s move today followed cuts from 19.0% to 18.0% in September and to 16.0% last month, likely keeping the boss happy, yet the lira is now down to historic lows versus the dollar, driving Turkish people to switch their bank accounts to more stable currencies.^[iii] Some analysts suspect this could finally break Erdogan’s political grip, teeing up some political uncertainty as chatter about early elections escalates.

So yes, fascinating! But it has incredibly limited reach and relevance for global investors. While Turkey is one of the Middle East’s most advanced economies, the MSCI Turkey’s market cap is only about $21 billion.^[iv] The index has just 11 constituents, none of which are huge global players.^[v] It has also experienced a steady drip of political and currency crises over the past decade, alienating many EM investors. Some coverage tried to portray it as an example of the risks one faces investing in EM broadly, but we think that is beyond a stretch. Turkey’s issues are unique and localized, and most EM constituents have relatively stronger institutions. Many are up quite nicely year to date, while Turkey is down double digits. It is true that political risks are more varied among EM nations compared to their developed-world counterparts in the MSCI World Index, but Turkey is far from representative, in our view.

As best we can tell, Turkey’s rate cut is stealing so many headlines today simply because there isn’t much else in the financial world to talk about. It isn’t the only small item getting outsized attention recently. Exhibit B: company spinoffs, which have generated numerous think pieces over the past week. It isn’t new for large companies with diverse business lines to spin off business units into separate, new firms. But three companies (Johnson & Johnson, General Electric and Toshiba) announced spinoffs in rapid succession, and pundits pounced. The commentary is still rolling in a week later. Exhibit C: the mountains of attention heaped on President Joe Biden’s impending revelation of whether he will reappoint Fed head Jerome Powell for another term—and the numerous articles detailing the biographies and viewpoints of his rumored potential replacements. You have to pass the time somehow, we guess.

In a way, we find this current mentality a bit refreshing—and a sign of sentiment. Pundits aren’t dissecting every economic data point in search of a cloud in a silver lining. They aren’t warning new lockdowns in Europe risk a triple-dip Continental recession this winter. Meanwhile, Bank of America’s fund manager survey, which showed rather dour sentiment last month, showed a sizable move from cash to stocks in November. Managers still registered the same old concerns (inflation, rate hikes, China). But judging from their actions, those fears lost some of their power. Headlines, which both reflect and amplify popular sentiment, seem to be sending similar signals.

Don’t get us wrong—we are far from the euphoria that threatens bull markets. The climate isn’t even broadly optimistic. It is just, well, dull—and for stocks, slow news is generally good news. We often quote Ben Graham’s famous observation that stocks are voting machines in the short term and weighing machines in the long run. When headlines churn constantly, it can send that voting machine into overdrive, heightening volatility. This isn’t always bad, as volatility cuts both ways. But it can be jarring. For as much as sharp negativity can scare everyone, sharp positivity can drive bubble and ­too-far-too-fast chatter. Slow news and calm returns are a classic Goldilocks scenario, which is what we have seen in November thus far, with the S&P 500 closing today at all-time highs.

Maybe this is just a holiday season lull and the hyperbolic coverage will soon pick up. After all, a fresh debt ceiling deadline looms next month, and a House vote on the “Build Back Better” budget reconciliation bill is pending. There is never a dull moment in investing. But if you have sought a break from heavy news, well, you are getting it right now. We suggest taking a cue from stocks—and enjoying it.