Some Fund Managers Keep Faith in Turkey

Shanny Basar

Some fund managers have argued there are still long-term opportunities in Turkey despite the volatility since the failed military coup last Friday.

Although the attempted coup on the evening of 15 July, was not successful there has been increased volatility in the Turkish equity market and a weakening of the lira.

Ghadir Abu Leil Cooper, head of EMEA and frontiers equities at Baring Asset Management in London, said in an email that short-term volatility is likely to continue but that the firm is a long-only equity investor that aims to identify companies that can potentially deliver superior long-term growth.

She added that the medium term outcome depends on how the policy response affects consumer confidence.Copper said that since the attempted coup the Minister of the Economy and the Central Bank governor held a conference call to confirm they would not intervene in the foreign exchange market and will make liquidity available to the banking system.

She argued that the opportunity in Turkish equities has not fundamentally changed and there are still companies that offer long-term growth such as Tupras, the leading refiner of petroleum, and Ford Otosan, the automotive manufacturer.

Ugras Ulku, senior economist, Europe at the Institute of International Finance, the trade group of financial institutions, agreed that the emergency liquidity measures announced by the central bank over the weekend helped Turkish assets recover some of their immediate losses. However he added: “Given Turkey’s chronic problem of large current account deficit and sizable external financing needs, the lira remains vulnerable to shifts in market sentiment.”

For example, the lira fell today following reports that the Turkish government has sacked more than 15,000 education staff.

The IIF continued that Moody’s and Fitch may downgrade Turkey from one notch above investment grade in their next review in August which could lead to institutional investors selling assets.

“While capital inflows were solid in the first half of 2016, flows are likely to weaken going forward. Turkish banks may find it harder to access foreign funding, unlike the first half of the year,” added the IIF. “Although most corporate FX debt is long-term, domestic corporations could experience rising balance sheet stress and weaker profits, especially those that do not have natural FX hedges.”

The IIF concluded that achieving stronger growth over the medium-term will require a shift from an economy that is overly reliant on domestic spending financed by foreign borrowing to a more export-oriented economy through reforms that boost productivity, competitiveness and domestic savings.

Emre Akcakmak, portfolio manager East Capital, the emerging and frontier market asset manager, said in a blog that since the coup he had flown through Istanbul’s second airport to witness the situation in Turkey.

Akcakmak added: “As asset managers managing one of world’s largest Turkey dedicated equity funds, we are concerned not only about short-term but also about long-term implications of what’s happening in Turkish politics.To put it bluntly, our base case is to see simply more of the same.”

He expects politics to continue to be a major source of volatility but that the economy will grow between 3% and 3.5% this year although investor sentiment will stay fragile. “We think that recent developments mark neither the end of the Turkish investment case nor the beginning of a better democracy,” added Akcakmak

East Capital will review its position in stocks related to tourism and consumer confidence but also expects to find good opportunities.

In contrast Nathan Griffiths, senior portfolio manager at NN IP, emerging markets, said in an email that the Dutch asset manager views Turkey as fundamentally negative and retains a long-standing underweight in the country.

“The reality is the market is unlikely to sell off aggressively,” added Griffiths. “Yet volatility will remain high and so risk-adjusted returns are unappealing to us.”

He expects any sell off to be fairly muted as the coup failed, was quickly denounced by opposition parties and the global investment backdrop remains very bullish.

Griffiths continued that it is certain that President Erdoğan will use the failed coup to further consolidate his power and remove political rivals. “As investors we dislike that direction and rarely is it positive for a country for one man to have such absolute power. And to exercise it in such a way,” he added.

From an economic perspective, NN IP said that over the past decade Turkey’s economic model has been overly dependent on credit-driven consumer spending and state transfers to the rural areas that underpin support for the AKP, President Erdoğan’s party. As tourism looks likely to fall, the government will stimulate consumer spending which will lead to a further deterioration in the current account deficit.

Griffiths said: “While there is no real sign of distress in the banking sector, the loan to deposit ratio is above 120% meaning the country is ever more dependent on foreign capital. With the CBT now under Erdogan’s control and likely to cut interest rates further to support growth, Turkey is increasingly vulnerable to external risk appetite.”

Jan Dehn, head of research at emerging markets specialist Ashmore Investment Management, agreed in a report this week that President Erdoğan is likely further centralise power to implement his vision of an investment-led development model with himself as its leading prime mover.

“Investment-led growth economies in Asia in particular were able to grow strongly on the back of high domestic savings rates and a very technocratic public administrations, which ensured that stable financing was available for investment and that investments were selected and implemented efficiently,” added Dehn. “Neither condition applies to Turkey, which sources much of its financing from fickle external portfolio flows and where the political elite exercises considerable discretion in project selection and implementation.”

He added that Turkey’s politicians also routinely intervene in monetary policy decisions which raises serious questions about the sustainability of the country’s credit-fuelled development model.

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