Turkey is widely expected to reach investment grade in the latter half of 2011, and if recent history is anything to go by, Turkish asset prices will appreciate ahead of an upgrade.
A number of banks, including HSBC, Citigroup, Merrill Lynch and Turkey’s Akbank, have suggested that the country will be upgraded this year, with Citi predicting a 50 per cent likelihood (or 70 per cent when excluding inflation and current account variables).
Turkey’s CDS spreads trade tighter than would be expected by its ratings level, and the country has improved its relative performance in the credit markets, thanks to the perception of its fiscal position and ability to successfully meet large external financing needs. Both these factors point toward an upgrade, say Citi analysts.
But what difference will an upgrade make?
Initially very little. Citi says when Brazil made investment grade in 2008, the immediate market reaction was "fairly muted".
This is because the macroeconomic and structural improvements that warranted the upgrade were priced in to Brazilian assets in the months leading up to rating agency’s decision.
Recent “favorable developments” in Turkish assets can be viewed in the same context, Citi analysts say.
The ISE 100 Index gained 20 per cent in 2010, and hit 71,543 - its highest point in five years - in December. Yesterday the index closed at 67,923.
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