Politics
Foreign investment interest in Türkiye continues to increase
Reuters
International investors are increasing their exposure to Turkey, focusing on local bonds and Credit Default Swaps (CDS), as monetary policy normalization takes deeper root, investors and analysts said .
Nearly a year ago, President Recep Tayyip Erdoğan – fresh off an electoral victory – approved the steep interest rate hikes sought by markets to combat soaring inflation, marking a a change from an unorthodox policy that had deterred investors from Turkey for almost a decade.
The central bank has increased its policy rate by a total of 4,150 basis points since June last year. At its policy meeting on May 23, the bank kept the main interest rate at 50% as planned, while remaining cautious about inflationary risks.
“Investors are coming back pretty aggressively now – the numbers are really strong. There's been a lot of inflow,” said Nick Eisinger, co-head of emerging markets active fixed income at Vanguard, which has more than $7 trillion in assets under management. .
“We are long the lira. We are long local bonds, but not by much, and then we are quite long credit,” he said, referring to the country's hard currency debt.
Citi analysts agree, saying this policy change has boosted interest in Turkish assets.
“We view the current moment as a kind of renaissance for Turkish markets across local, external, corporate credit and equity markets,” Citi’s Luis Costa wrote in a note to clients.
The rise in Turkish assets has been broad-based, with the country's main stock index up more than 46% since the start of the year, propelled by a roughly 80% rise in the banking sector over the same period.
Domestic government bond yields are above 4% year to date, far outperforming the less than 1% yield on the broader JPMorgan GBI-EM Global Diversified Index.
Bonds had already benefited from a first wave of foreign interest in November, after which it cooled off. But interest was revived after a 500 basis point interest rate hike in March and the opposition's success in local elections on March 31.
Will the lira stabilize?
Turkish hard currency debt returned 2.4%, broadly in line with the broader JPMorgan EMBI Global Diversified index. However, over the past 12 months, Turkey's returns stood at 24.6%, more than double those of the broader index.
While sterling has weakened more than 8% against the dollar since the start of the year, the currency has stabilized since hitting a record low in mid-April. Monetary conditions are now quite tight, Vanguard's Eisinger said, with dedollarization underway.
“In real terms, the currency is appreciating, which is a good thing, and they want to do that because it's a good anchor to reduce inflation,” Eisinger said.
On stocks, Citi said it had become neutral on banks following the strong stock market rally. Turkey Banking Association President Alpaslan Çakar said the banking sector was strong, with no asset quality issues and a low rate of non-performing loans.
In the future, CDS – instruments used to insure an issuer's exposure against default – could be the next big deal for investors, Eisinger said.
Turkey's 5-year CDS stood at 264 basis points on May 23, less than half of the 673 basis points 12 months ago.
“Turkey's CDS could easily reach 225 if they do things right – that's a big deal,” Eisinger said. “If you put that in size and they achieve it, it’s a big deal.”
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