What's going on?

Turkey and the US are embroiled in a diplomatic spat of increasing proportions � and the latest escalation heaped pressure on Turkey�s currency, stocks and government bonds on Monday.

What does this mean?

On Sunday, the Trump administration said it would stop issuing visas for Turks to visit the US (the latest escalation in a dispute between the two countries that has lasted more than a year) � and Turkey quickly responded in kind.


Markets on Monday reacted aggressively to the escalating tensions. The brunt of the impact isn�t so much on Turkey�s tourism industry (Americans only make up a small percentage of tourists that visit Turkey), but is more broad in that it�s another sign of political instability, which makes Turkey less attractive for foreign investors.

Why should I care?

For the market: Turkish investments had a very bad day.

The lira dropped about 2% versus the dollar, while Turkish stocks fell more than 3% � meaning a US investor in Turkish stocks would have an overall loss of more than 5% on Monday (when the effect of the currency selloff is taken into account). Turkey�s economy relies to a relatively large extent on funding from foreigners. Messy diplomatic disputes and, relatedly, turbulent domestic politics tend to scare away new foreign investors, causing substantial losses for those already invested in the country.


The bigger picture: Investments in emerging markets often involve greater political risk than in developed countries.

Although political risk has seemingly become more relevant in developed economies lately (e.g. Trump�s election and Brexit), it�s usually much more relevant when investing in emerging markets. Investors in South Africa are weighing up the impact of the controversial Zuma government, while Brazil�s markets were roiled by a major political scandal a few years ago (before rebounding sharply in recent years). In short, politics is a risk that investors in emerging markets need to be well aware of.