It wasn’t long ago, only in March, most EM funds shunned Turkey betting on president Erdogan booting economy czar Mehmet Simsek after 31 March municipal elections. Additionally, Erdogan’s commitment to orthodox economic policy was in doubt. It wasn’t only global funds which displayed skepticism about TL assets. Locals ran on TL deposits, transferring $10 bn abroad in March alone fearing a large currency depreciation after the elections.
None of this happened. The prickly Turkish president stuck with the Simsek-run austerity program, demonstrating his determination by allowing the Central Bank to hike rates by 500 basis points only a couple of days before the ballot. Also, he turned down please from his rank and file to announce ad hoc pay hikes for pensioners, who were abandoning the party in droves. He lost the election, but gained the hearts of foreign investors.
Locals, too, are repatriating funds held abroad, as Simsek and CBRT governor Fatih Karahan drum the mantra of “strong TL” daily.
International investors are ramping up exposure to Turkey, focusing on local bonds and Credit Default Swaps (CDS) as monetary policy normalisation is becoming more deep rooted, investors and analysts said, reports Reuters.
“Investors are getting back in quite aggressively now – the numbers are really strong. There’s been a lot of inflows,” said Nick Eisinger, co-head of Emerging Markets Active Fixed Income at Vanguard, which has more than $7 trillion in assets under management.
“We’re long on the lira. We’re long on the local bonds, but not a lot, and then we’re quite long on the credit,” he said, referring to the country’s hard-currency debt.
Analysts at Citi agreed, saying the shift in policy had stimulated interest in Turkish assets.
“We see the current moment as somewhat of a renaissance for Turkish markets across local, external, corporate credit and equity markets,” Citi’s Luis Costa wrote in a note to clients.
Big-money investors are beginning to place more cash in emerging markets as they chase returns in what could be a structural shift in the way they allocate their money, a veteran Bank of America economist told Reuters, which explains the second reason for Turkey’s attraction. EM risk appetite is much stronger than EPFR data illuminates. Also, Countries with positive growth or reform stories, including Mexico, Brazil, Turkey, India and Poland, are getting the money. Short-term bets in Egypt and Nigeria have also become popular.
The rally across Turkish assets has been broad-based, with the country’s main stock index up more than 46% since the beginning of the year, propelled by an around 80% rally in the banking sector over the same period. ,
BBVA EMEA strategist Tufan Comert shared in his Sunday X post that he found very receptive Arab investors during his road trip there.
Monetary conditions are quite tight now, said Vanguard’s Eisinger, with de-dollarization underway.
“In real terms, the currency appreciates, which is a good thing, and they want to do that because it’s a good anchor to cut inflation,” Eisinger said.
On stocks, Citi said it had turned neutral on banks following the strong share market rally. Turkish Banks Association Chairman Alparslan Cakar said the banking sector was strong, with no problems in asset quality and the non-performing loans rate low.
How long?
In the midst of growing plaudits, Simsek’s Economic Stabilization Program is not guaranteed success. CBRT refuses to acknowledge that inflation expectations are much stickier than observed in its monthly survey, keeping rates lower than necessary. As a result, there are scant signs of a slow-down in domestic demand, which will exacerbate price pressures in winter months.
Simsek needs to cut the budget deficit by another percentage point of GDP, or even more, to break the back of rampant private consumption. There, it is not clear he has the go-ahead from Erdogan, who insists designation is compatible with a strong economy.
Turkish markets are set to enjoy their best summer and autumn months, but much more needs to be done to preserve the gains, come winter.
PA Turkey staff
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