The world is in the midst of its first contagious financial panic since the early days of the Covid-19 epidemic, which is not expected to last for more than a couple of weeks, because it started at the eve of rate cuts by Fed and ECB, while according to July global composite PMI figures (52.5 vs 53.7 the prior mth), the global economy is ticking along nicely, driven by services. Despite the war scare in Middle East, oil prices declined on Monday, buffering financial markets from the worst effects of the confidence shock.
Turkey’s exchange rate and Borsa Istanbul, too, fell prey to herd behavior, with USD/TL up by 0.37% at the close, as the main equity index shed 5.5% vs Friday’s close.
With their cheap valuations, strong growth narrative and their Central Banks being way ahead of Fed and ECB in terms of loosening monetary policy Emerging Markets could potentially recover faster than Developed Markets from the contagious panic. In this scenario, Turkey could draw in substantial financial investment, because economy czar Mehmet Simsek is making believers out of skeptical global EM funds, according to a recent Bloomberg article.
“Just a few months ago, Amundi SA warned investors should stay clear of Turkish bonds. Now, it’s among their favorite trades.
The $2.3 trillion money manager believes Turkey is charting a path back to economic normalcy that will supercharge its markets. It’s part of a wider transformation that’s taken place since March as skeptical investors turn bullish on the tough reforms led by a team of technocrats under President Recep Tayyip Erdogan.
What started as a trickle of investor cash last year is now a torrent, and firms from Abrdn Plc to Vanguard Asset Services Ltd. are building up positions. Foreign ownership of Turkish stocks and bonds now stands at the highest level in five years, with more than $30 billion flowing in since May 2023, according to central bank data compiled by Bloomberg. It shows that money managers, who left when Erdogan enacted his controversial policy of cutting interest rates in the face of double-digit inflation, are quickly coming back”, stated Bloomberg journalists.
Of course, some will remain doubtful about Erdogan’s determination to stick with the austerity program, which is costing him and his party significant voter support:
“The influx of foreign capital into Turkish assets may be overdone, according to Bob Savage, head of markets and strategy at BNY. He says investors are ignoring pitfalls, such as geopolitical risks that could lead to a reversal of inflows.
“Turkey is at the crossroads of a mess,” Savage said in an interview. “You could see the Iranian-Israeli conflict getting worse. You could see the Russia-Ukraine conflict getting worse. And Iran being part of that story and Turkey being caught in the middle.”
Fari point, of course. According to latest polls, Erdogan is now the fourth most popular political figure in the country, after CHP chairman Ozgur Ozel, and two CHP mayors Ekrem Imamoglu and Mansur Yavas, of Istanbul and Ankara, respectively. His AKP party has been languishing below CHP in every poll taken since 31 Marhc 2024 local elections. Even more alarmingly for Erdogan, the once slavishly loyal business community is protesting loudly against rising loan rates and Central Bank’s strong TL policy, erasing profitability in export markets.
It is hard to predict Erdogan, who is very moody and opportunistic, but since he and his partner Devlet Bahceli outright rejected an offer from Ozgur Ozel for early elections by 2025, in return for granting Erdogan another term to run for president, it is safe to say that he is under no time pressure to ditch Simsek and austerity.
As passing months prove Erdogan’s faith in the austerity program, more funds are expected to cast aside their doubts to invest into Turkey.
Turkey would be particularly attractive, if the war scare between Israel and the Iran-Hezbollah axis were to blow over and energy prices remain low, on account of demand weakness in EU, US and China.
On the other hand, those who want serious progress in disinflation will be disappointed and probably remain on the sidelines. A leading economist, who wished to remain anonymous told PA Turkey after Monday’s inflation print that
“Today’s poor print may indeed prove transitory, but the CBRT nevertheless has a very challenging and a bumpy road ahead. We will learn more about the Bank’s thinking (and figures) in its technical note tomorrow, but more importantly, at the upcoming Inflation Report presentation on Thursday. Parenthetically, some upward revisions to May forecasts, particularly to the end-2025 forecast of 14%, combined with a widening of the uncertainty band, would not surprise us very much….”
Sticky inflation which continues to overshoot CB targets is not a major problem for global funds, as long as CB sticks to its current hawkish policy stance, which incidentally also underpins TL strength.
A particular bonus for Turkish assets will be the announcement of spending cuts or new revenue measures, promised by VP Cevdet Yilmaz and Mehmet Simsek, which may be unveiled in September, subject to Erdogan’s blessing, of course.
By Atilla Yesilada
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