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Could Turkey's currency troubles spell opportunity for some clients?

Roiled by an escalating tariff battle and worsening relations between the United States and Turkey, the value of the Turkish lira has tumbled. Lack of action from the country's central bank to halt inflation has sparked fears that the instability could spread either throughout Europe or to other emerging markets.

However, planners should consider urging clients to not waste time worrying about Turkey's troubles and, instead, consider the opportunities they could present, several advisors say.

A crumpled 20 Turkish Lira banknotes sits in this arranged photograph in London, U.K., on Wednesday, Aug. 15, 2018. Turkey took its boldest steps yet to try to ward off a financial crisis by making it harder for traders to bet against the battered lira and easing rules on restructuring troubled loans that have already topped $20 billion.
A crumpled 20 Turkish Lira banknotes sits in this arranged photograph in London, U.K., on Wednesday, Aug. 15, 2018. Turkey took its boldest steps yet to try to ward off a financial crisis by making it harder for traders to bet against the battered lira and easing rules on restructuring troubled loans that have already topped $20 billion. Photographer: Chris Ratcliffe/Bloomberg

"Yes, it comes with extra risk," Seth Streeter, CEO of Mission Wealth in Santa Barbara, California, says of investing in emerging markets like Turkey, "but it's still an important asset class to have in a portfolio."

Concerns about Turkey are heightened since its problems have followed and unfolded in tandem with those of another emerging market, Argentina. Both countries have been beset by double-digit inflation and currencies that lost about 30% of their value just so far in August.

"Turkey and Argentina are what some of our managers would call the problem children this year," says Karin Anderson, an associate director on Morningstar's manager research team. For recent historical touchstones, she points to other problem children including Brazil, Mexico and Ukraine.

"When you have situations like this," Anderson says, regarding Argentina and Turkey, "the sell-offs came most heavily when their central banks did not do what was expected. [They] did not undertake the normalizing of monetary policy. You do end up seeing knock-on effects with other emerging markets."

And where some rush out, it's time for others to rush in, advisors say.

"If emerging markets stocks are low, we are going to be buying those," says Susan Olson, an advisor with Abacus Wealth Partners in Sebastopol, California. "I try to spin it and say, 'Hey, it's a great opportunity to buy low.' Usually people get that."

Abacus, which relies heavily on Dimensional Funds for its investment strategy, refrains from trying to time the market "ever, ever, ever," Olson insists. However, she adds, some buying opportunities are part of ongoing rebalancing.

"Normally, I tell people we help them invest in the broadest portfolio possible, investing in mutual funds and countries all over the world because we never know what asset class will do well at any given time," Olson says. "We tell [clients] we are constantly rebalancing their portfolios."

About 5% of the typical Mission Wealth client's portfolio is in emerging markets stocks and bonds, Streeter says. Of that, Turkey accounts for less than 1%, small enough to assuage client concerns about being impacted by the turmoil.

Some advisors have looked to European banks to gauge their view of the situation.

While those institutions have expressed concern about Turkey, Mission Wealth CIO Kieran Osborne says even the banks’ vulnerability is not so great as their physical proximity might suggest.

"The exposure within the European banks is minimal," Osborne says. "It's large in absolute numbers but a minimal percentage."

When markets have been strong for so long, people tend to speculate about what might one day trigger a downturn, Anderson says.

"I can't speak to that," Anderson cautions about another downturn following the Great Recession of a decade ago, while adding that "you certainly start to wonder when you start to see the jitters around the whole emerging markets space. When you see the U.S. high yield [market] still trading at record valuations [and] the U.S. stock market maybe going to beat the 10-year bull market record, you start to wonder if this is the trigger for a broader sell-off."

In emerging markets, the fact that "abrupt sell-offs" happen make them both too volatile for some and attractive to others, Anderson says.

One way to protect clients against the worst of volatility might be to avoid currencies, Anderson suggests.

"You see very dramatic losses, often within a year at times," she says. "It's just something that a client needs to know about. If you don't want to, don't invest in the currencies."

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