Mark Bentley
Sep 12 2018

Turkey starting to look more attractive to fund managers

Turkish assets are starting to look more attractive to some fund managers following a currency rout that slashed the value of Turkish stocks and bonds.

The main BIST-100 index has slumped 19 percent this year, not including a 40-percent dive in the lira’s value against the dollar. Large-cap banks have taken the brunt of the sell-off, sliding 44 percent. Benchmark 10-year bonds denominated in lira have also plummetted, with yields surging to 22.8 percent in mid-August from 11.5 percent at the start of 2018.

In a column for the Financial Times earlier this week, Paul McNamara, director of emerging markets for Swiss fund manager GAM, said that selling pressure may continue as the economy enters a likely contraction, but it is becoming more difficult for investors to profit from negative sentiment.

“EMs have a tendency to overshoot — and by some measures this was what happened with this year’s sell-off in Turkey,” McNamara said. “The easy money from short selling Turkey has surely been made.”

Turkey has led a sell-off in emerging markets this year as the government caused the economy to overheat through a pile of stimulus measures and then tangled with the United States during August over its detention of over a dozen Americans, leading to sanctions. Economists are now predicting an economic contraction from as early as the third quarter of this year.

But investors who were brave enough to buy liras after the currency hit a record low in mid-August would have made some rich returns.

Erik Zipf, who manages $430 million for DuPont Capital Management, says he has added Turkey to his list of buys.

The country’s stocks are near financial crisis valuation levels, while the lira is undervalued by a “significant amount”, Zipf, who is based in Delaware, said in an interview with Bloomberg TV.

Some Turkish assets have already been bought up, particularly stocks of companies that export a large portion of their products. The lira’s declines have created price advantages for such companies in international markets.

Ford Otosan, which was Turkey’s top exporter last year with sales of $4.8 billion, has seen its shares surge 19 percent since Aug. 16, three days after the lira hit its record low of 7.23 per dollar. That beat the main index’s 6 percent advance. A sub-index of tourism firms, which are benefitting from the lira’s losses as foreigners buy up cheap holidays, has increased 8.3 percent. Tofaş, the maker of Fiat cars and Turkey’s 3rd-biggest exporter in 2017, rose 9 percent during the period.

Ford Otosan
Ford Otosan CEO Haydar Yenigün

Profits from buying Turkish shares have swelled for investors brave enough to exchange foreign currency to buy them. The lira has climbed more than 10 percent since reaching its record low.

Turkish assets will become more attractive to investors should the central bank meet market expectations and hike its benchmark rate on Thursday, said Tim Ash, senior emerging markets strategist at London-based hedge fund Blue Bay Asset Management.

“If they hike 200-300 basis points, likely the lira rallies, and we can see light at the end of the tunnel given the obvious re-balancing,” Ash said in an e-mailed note to clients.

The lira advanced 1.2 percent to 6.34 per dollar at 3:31 p.m. in Istanbul, the strongest level in two weeks, partly on expectation that policymakers would raise interest rates.

The central bank has not hiked its benchmark rate of 17.75 percent since June even as the lira’s slump deepened, prompting outflows of funds from the bond and stock markets.

Turkish credit default swaps have also been rallying this month. The swaps traded at 521.9 on Wednesday, stronger than the low of 574.4 reached at the start of September, the most expensive since 2009. The products, which reflect the cost of insuring Turkish sovereign bonds against non-payment, had traded at 155 at the beginning of the year. The country has never defaulted on its debt.

Yields on both two-year and 10-year lira bonds have started to firm even as inflation surged to almost 18 percent last month. Rates on the longer-term bonds have dropped below 20 percent while the two-year paper trades at 24 percent, off a low of 30.8 percent reached in mid-August.

Turkish inflation is expected to slow in 2019, widening potential margins for current holders of the debt, after reaching almost 20 percent by December, according to a central bank survey,.