Foreigners edge back into Turkish markets

ANKARA / NEW YORK

Foreign investors who remained aloof from Turkey for a few years are edging back in, drawn by a promise of some of the biggest returns in emerging markets and a pledge of economic and legal reforms, according to money managers.

“We’re very encouraged to see a different approach coming in,” said Polina Kurdyavko, London-based head of emerging markets (EMs) at BlueBay Asset Management, which manages $67 billion.

“We have added to our exposure and we plan to keep it that way as long as we continue to see the orthodox steps,” she told Reuters.

More than $15 billion has streamed into Turkish assets since November 2020, when President Recep Tayyip Erdoğan promised a new market-friendly era and overhauled the economy management team with new appointments to the helms of the Central Bank and the Treasury and Finance Ministry.

Interviews with more than a dozen foreign money managers and Turkish bankers said those inflows could double by mid-year, especially if larger investment funds take longer-term positions. Six Turkish bankers told Reuters they expect foreigners to hold 10 percent of the debt by mid-year on between $7 to 15 billion of inflows. Deutsche Bank sees about $10 billion arriving.

Turkey’s asset valuations and interest rates are among the most attractive globally. It is also lifted by a wave of optimism over coronavirus vaccines and economic rebound that pushed EM inflows to their highest level since 2013 in the fourth quarter, according to the Institute of International Finance.

Newly appointed Central Bank governor Naci Ağbal has hiked interest rates from 10.25 percent to 17 percent and promised even tighter policy if needed. Swift monetary tightening has lifted Turkey’s real rate from deep in negative territory to 2.4 percent, compared to an EM average of 0.5 percent.

The Central Bank’s Monetary Policy Committee last week expressed its determination to bring down the headline inflation rate, which has been over 14 percent in the last two months, to single digits.

Paris-based Carmignac, which manages $45 billion in assets, may take the plunge after a year away.

“There could be some value in Turkish assets and we have started to look with a little bit more interest especially with the very high rates,” said Joseph Mouawad, emerging debt fund manager at the firm.

“It is still a hairy market to invest in but for sure, relative to what has been happening in the last 18 months, things have dramatically shifted and ... that has a lot to do with the people running the economic policy,” he said.

Some long-term investors “are cozying up to the idea of being long Turkey but it’s a long process,” Reuters quoted one banker as saying on condition of anonymity.

Turkish stocks have rallied 33 percent to records since November 2020.

Meanwhile, foreign bond ownership has rebounded in recent months above 5 percent, from 3.5 percent, though it is well off the 20 percent of four years ago and remains one of the smallest foreign footprints of any emerging market.

Many investors say only a reversal in this dollarization will rehabilitate the reputation of Turkey. Stung by years of double-digit food inflation, eroded wealth and a boom-bust economy, Turkish investors have bought up a record $235 billion in hard currencies.

The Turkish Lira rose 0.4 percent to the U.S. dollar yesterday, leading gains across Europe, the Middle East and Africa (EMEA) after ratings agency Standards and Poors on Jan. 22 posited a stable economic outlook for the country, citing optimism over recent monetary tightening.

As sentiment towards the lira improved after the interest rate hikes, it recovered to around 7.40 from an all-time low of 8.57 against the dollar on Nov. 6, 2020.

Ağbal will hold an online press conference on Jan. 28 to reveal the quarterly inflation report. In its final inflation report of 2020, the bank forecast the annual consumer price index to average 9.4 percent at the end of this year.