Just a few months ago, Amundi SA warned investors should stay clear of Turkish bonds. Now, it’s among their favorite trades.
The $2.3 trillion money manager believes Turkey is charting a path back to economic normalcy that will supercharge its markets. It’s part of a wider transformation that’s taken place since March as skeptical investors turn bullish on the tough reforms led by a team of technocrats under President Recep Tayyip Erdogan.
What started as a trickle of investor cash last year is now a torrent, and firms from Abrdn Plc to Vanguard Asset Services Ltd. are building up positions. Foreign ownership of Turkish stocks and bonds now stands at the highest level in five years, with more than $30 billion flowing in since May 2023, according to central bank data compiled by Bloomberg. It shows that money managers, who left when Erdogan enacted his controversial policy of cutting interest rates in the face of double-digit inflation, are quickly coming back.
Still, for all the enthusiasm over rallying markets, many are quick to point out that Turkey still has a long way to go. The country has one of the world’s highest inflation rates, and Erdogan’s track record of U-turns and surprise decisions hasn’t been forgotten. Foreign ownership of stocks and bonds is a fraction of what it used to be in 2012.
“It’s going to take some time. It isn’t going to be a Big Bang,” said Yerlan Syzdykov, who leads Amundi’s emerging-markets division. “The economic team is managing political and market pressures quite well, and we are happy to be positive across fixed income and equity.”
Turkey is now “the number one topic” for emerging-market investors, said Simon Quijano-Evans, the chief economist at Gemcorp Capital Management Ltd. Amundi, Europe’s largest asset manager, now counts Turkey as a top five holding among emerging-market local currency bonds, having also scooped up corporate debt and shares.
Bullish investors see a growing body of evidence that the economy is finding stability. The central bank announced this month that its returning a $5 billion deposit from Saudi Arabia, which indicated to analysts that Turkey’s is confident in its ability to restore foreign-exchange reserves. The news came just days after Moody’s Ratings raised the country’s credit score for the first time in more than a decade.
“We’ve been very impressed with policy in Turkey,” said Arif Joshi, who supervises about $9 billion as co-head of the emerging-market debt team at Lazard Asset Management in New York.
Three years ago, the situation couldn’t have been more different after the firing of central bank chief Naci Agbal, who raised interest rates to quell inflation. Subsequently Erdogan doubled down on policies that caused price growth to skyrocket. So when the Turkish president chose Mehmet Simsek as finance minister in June 2023, there were plenty of doubts that he’d face a different fate than his predecessors.
Instead, Simsek and a new team at the central bank embarked on a cycle of monetary tightening, hoisting the main rate to 50%. They loosened some controls on the lira and gradually pivoted back toward more orthodox policies. The key turning point, investors say, was Erdogan’s choice not to shake up key economic posts after his allies were defeated in local elections in March — a move that signaled commitment to his team.
Stocks and bonds have soared in the months since the late March election. Local-currency bonds have risen 6.3%, outstripping the 1.1% average of similar emerging- market debt. The Borsa Istanbul 100 stock index has returned 16% in dollar terms, making it one of the world’s best-performing indexes.
Meanwhile, the lira is showing early signs of stability, hovering around 33 to the dollar in the past few months. The currency has undergone a massive depreciation in recent years caused by inflation rates above 70%.
The influx of foreign capital into Turkish assets may be overdone, according to Bob Savage, head of markets and strategy at BNY. He says investors are ignoring pitfalls, such as geopolitical risks that could lead to a reversal of inflows.
“Turkey is at the crossroads of a mess,” Savage said in an interview. “You could see the Iranian-Israeli conflict getting worse. You could see the Russia-Ukraine conflict getting worse. And Iran being part of that story and Turkey being caught in the middle.”
Kieran Curtis, investment director at Abrdn in London, said he’s been increasing Turkish holdings even as longer-term political risks persist. “I trust the current finance and economy team, but there is always the chance that next time an election needs fighting, there will be a change,” he said. “Frankly, I don’t think anyone can take a long-term view on this.”
But for now, investors are praising Simsek for tackling inflation and building up in the country’s foreign exchange reserves, while still warning that the mission isn’t over yet.
“They've done a very good job of communicating what they are trying to accomplish,” said Jeff Grills, head of emerging markets debt at Aegon Asset Management. “They still haven't won. Inflation is still running very high, but the market has clearly given them the benefit of the doubt. So the challenge I think for Turkey from an investment standpoint is spreads have already priced in a victory on everything that they need to accomplish.”
Still in the view of Nick Eisinger, co-head of emerging markets active fixed income at Vanguard Asset Services Ltd., one of the attractions of investing in Turkey is how under-invested the market is. He’s flipped from being running short trades on the lira to holding small long positions, and owning 10-year bonds as the country’s economy and its foreign reserves strengthened.
“There's a lot of room for investors to get back into the market,” he said. “The next big thing really is going to be when inflation turns. Because when that happens, then I think you'll get another wave.”
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