(Bloomberg) — Turkey is winning over investors as bets grow on its economic firepower and the continuation of a yearlong shift back to conventional policy.
Most Read from Bloomberg
Lira bonds have absorbed a record $6.5 billion of foreign inflows in May, while stocks have soared 30% in dollar terms this year, one of the best equity market performances in the world. The country’s net foreign exchange reserves grew by $65 billion since the end of March, according to calculations by economists at HSBC Asset Management in Istanbul.
That’s a huge change from a year ago, when investors had little faith in President Recep Tayyip Erdogan’s controversial policies, including those that sought to lower inflation through interest rate cuts. At the time, the authorities were propping up the lira and draining currency reserves.
Even long-standing skeptics are coming around. Carmen Altenkirch, an analyst at Aviva Investors Global Services Ltd, said that in the past she would have told clients to “get in and get out before Erdogan gets you.” But given all the changes and the fact that there’s no sign of reversal, this time really does appear to be different.
“To say that Turkey’s turnaround has been impressive is an understatement,” Altenkirch said. “It now looks like the economics team has been given the power to do the right thing.”
The pivot began after last May’s elections with Erdogan’s appointment of a more market-friendly team of economic officials led by former Wall Street banker Mehmet Simsek. The key interest rate was hiked to 50% from 8.5%, cementing the return to policy orthodoxy that is now resonating with foreign investors.
“Turkey has everything going for it,” said Simon Quijano-Evans, a London-based economist at Gemcorp Capital. “If the leadership allows Simsek and the central bank to continue fighting inflation, there will likely be plenty more foreign investment flows and ratings upgrades.”
The sentiment turned gradually over “several months,” he said, particularly following Turkey’s local elections on March 31, when it become clear that Simsek would be allowed to continue with his reforms. The country’s $1 trillion economy is also heating up.
Turkey’s local-currency government bonds rallied in May with the yield on two-year notes falling 2.81 percentage points. Borrowing in dollars and investing in the lira has become one of the top three most profitable emerging-market carry trades this month.
‘Virtuous Cycle’ Opportunity
Magdalena Polan, head of emerging-market macro research at PGIM Fixed Income in London, sees the beginning of a “virtuous cycle,” adding that Turkey has to commit to its economic policies to see investment dollars continue to flow.
Turkey’s risks include curbs on access to the lira by overseas investors, $175 billion in short-term external debt and current account deficits. Erdogan also has a track record for surprise changes in the country’s economic leadership.
There are signs that it get easier for investors to buy Turkish assets. Officials are studying the easing of restrictions on offshore currency swaps, which would lift a major obstacle to attracting more foreign money into lira-denominated assets, Bloomberg reported this month.
Record Inflows
Net foreign-investor purchases of lira-denominated government bonds in May are on track for the biggest ever monthly inflow, according to Bloomberg’s calculations of the latest data as of May 24. Non-resident holdings of lira bonds are at a four-year high of $9.6 billion.
Local bonds have returned 3.3% in the month, versus 1.1% for emerging market local debt as a whole, according to a Bloomberg index. Turkish banking stocks have risen 14% in their seventh consecutive monthly advance in May. The Borsa Istanbul equity index has advanced 7% in the month, at a time the MSCI EM benchmark index has gained 0.5%. At the same time, Turkish firms are busy selling bonds on foreign markets.
Citigroup Inc. said this month that Turkish markets are on the verge of a “renaissance moment” after years of near-zero foreign participation. Bank of America strategists said the lira was the best bet among emerging currencies in Europe, the Middle East and Africa and recommended buying currency forwards.
Hussein Khattab, a portfolio manager at Morgan Stanley IM, a firm with $1.5 trillion under management, said Turkey’s new monetary regime is working and a return to a more conventional overall economic policy stance would further boost the country’s outlook.
“Further sustained reform in Turkey, especially on institution building and fiscal consolidation, goes above and beyond macro stability and will improve the long term trajectory of the country,” he said.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.
From: Yahoo.com
Financial News
