Last Updated on May 26, 2024 by Ideal Editor
Foreign Investors Flock Back to Turkey: Vanguard Sees Opportunity
Foreign Investors Flock Back to Turkey, ramping up their involvement in the country, focusing on local bonds and credit default swaps (CDS) as the country’s monetary policy normalization continues to gain momentum, according to experts and analysts.
Nearly a year ago, President Recep Tayyip Erdoğan, fresh off an election victory, endorsed significant interest rate hikes to tackle rampant inflation, marking a significant shift from years of loose monetary policy. Since June last year, the central bank has raised its policy rate by a total of 4,150 basis points. In its recent policy meeting, the bank maintained the main interest rate at 50%, as anticipated, while remaining cautious about inflation risks.
“Investors are returning aggressively – the inflow numbers are impressive,” said Nick Eisinger, co-head of Emerging Markets Active Fixed Income at Vanguard, which manages over $7 trillion in assets. “We’re bullish on the Turkish lira and local bonds, albeit modestly, and we’re quite bullish on the credit,” he added, referring to Turkey’s hard-currency debt.
A Renaissance for Turkish Markets
Analysts at Citi echo this sentiment, noting that the shift in policy has spurred renewed interest in Turkish assets. “We view the current period as a renaissance for Turkish markets across local, external, corporate credit, and equity markets,” wrote Citi’s Luis Costa in a note to clients.
Turkish assets have seen a broad-based rally, with the country’s main stock index climbing more than 46% since the beginning of the year, driven by an approximately 80% surge in the banking sector. Domestic government bonds have yielded over 4% year-to-date, significantly outperforming the broader JPMorgan GBI-EM Global Diversified index, which has returned less than 1%.
After an initial wave of foreign interest in November, the enthusiasm for Turkish bonds cooled but was reignited following a 500 basis point interest rate hike in March and the local elections on March 31.
Stabilizing the Lira
Turkey’s hard-currency debt has returned 2.4%, aligning with the broader JPMorgan EMBI Global Diversified index. However, over the past 12 months, Turkey’s returns were 24.6% – more than double the wider index.
Although the lira has depreciated by more than 8% against the dollar this year, it has stabilized since hitting a record low in mid-April. Vanguard’s Eisinger noted that monetary conditions are now quite tight, with de-dollarization efforts underway. “In real terms, the currency appreciates, which is beneficial as it helps anchor inflation,” he said.
Regarding stocks, Citi has taken a neutral stance on banks after the significant share market rally. Alparslan Çakar, Chairperson of the Turkish Banks Association, confirmed the banking sector’s strength, citing low non-performing loan rates and robust asset quality.
Looking ahead, Eisinger suggested that CDS – used to insure against default risk – could be the next major trade for investors. Turkey’s five-year CDS stood at 264 basis points on Thursday, significantly lower than the 673 bps a year ago. “Turkey’s CDS could easily drop to 225 if the conditions are right – that’s a substantial trade,” said Eisinger. “Investing heavily in this could yield significant returns if successful.”
