Turkish assets ride wave of foreign investment
ISTANBUL (Reuters) - Turkish assets are riding a wave of foreign portfolio investment as the country's deepening capital markets, robust growth and hopes for a second investment-grade rating catch the eye of yield-hungry fund managers.
Gulf Arab investors, who traditionally poured money into assets in debt-choked U.S. and European markets, have helped drive the explosion in demand, joining funds from Europe, Asia and the United States.
Foreign funds have been drawn in part by a widening range of investment products, from a debut sovereign sukuk (Islamic bond) issue last September, which attracted high Gulf demand, to a continuing slew of foreign currency-denominated Eurobonds from banks and corporations.
Turkish central bank data showed portfolio inflows last year rose 60 percent to $35 billion. Foreign investors' bond portfolios rose a net $16 billion in 2012 and bankers said inflows to bonds had already exceeded $1.5 billion this year.
"Turkey is on the radar of most international portfolio investors globally," said Giambattista Atzeni, vice president at BNY Mellon Corporate Trust in Dubai.
"It's by far the most interesting emerging market in the region with a deep capital market, favourable regulatory environment and a diversified range of investment products."
Turkish banks issued $10.5 billion of forex-denominated Eurobonds in 2012, a total which rises to $12.5 billion if issues from corporates such as brewer Anadolu Efes (AEFES.IS) and oil refiner Tupras (TUPRS.IS) are included.
White goods maker Arcelik (ARCLK.IS) and Sabiha Gokcen Havalimanlar�, the company that operates Istanbul's second airport, are in the pipeline to issue new foreign currency Eurobonds this year.
A public debt-to-gross domestic product ratio below 40 percent, expected economic growth this year of around 4 percent and a narrowing of the current account deficit - Turkey's major economic weakness - mean investor appetite for Turkish assets is likely to remain strong.
"Interest rates have fallen and we expect them to stay at low levels for a while, but most importantly, unpredictable risks in Turkey have fallen drastically," said Ahmet Yildirim, general manager at bank Yapi Kredi Yatirim (YKBNK.IS).
"It's wrong to say Turkey is rallying. It is getting where it deserves to be."
Fitch gave Turkey its first investment-grade credit rating in 18 years last November, an endorsement of the country's economic transformation over the last decade under Prime Minister Tayyip Erdogan. It highlighted Turkey's moderate and declining debt burden and the health of its banks.
"After Fitch's rating upgrade, demand for Turkish assets has risen so far that foreign investors are coming to us and saying 'we will buy whatever you issue'," Isbank Deputy General Manager Erdal Aral said, adding that the bank was working on new lira-based instruments.
Turkey needs at least one of the two other major ratings agencies to follow suit for it to join benchmark investment- grade bond indexes, a status that many funds require before investing in a country.
Moody's, which rates Turkey just below investment grade at Ba1 with a positive outlook, said on Monday that before it would consider an upgrade, Turkey needed to improve its resilience to external shocks by further narrowing its current account deficit or boosting foreign reserves.
But Moody's also predicted strong exports and a slight rebound in domestic demand would push economic growth up to 3.8 percent this year, and said a rebalancing in the economy had already brought a decline in the current account deficit.
Many Turkish analysts expect Moody's to give Turkey its second investment-grade rating later this year.
"I expect a rating upgrade from Moody's any time after end-February," said the treasury manager of one Turkish bank.
"We have been seeing a noticeable inflow from the Gulf region recently but it is not only coming from there. Is this a balloon? Yes it is, but the party will go on until the music is over."
Turkey's economy was the fastest-growing in Europe in 2011, expanding 8.5 percent, but domestic demand slumped last year and instead net exports drove growth as companies diversified into new markets.
Finance Minister Mehmet Simsek said earlier this month that the economy had successfully navigated a soft landing and that this year would see a return to "strong and balanced" growth of around 4 percent.
"If we look on an absolute basis Turkey looks rich, but if you think of the options that people have who are running funds, then it's not expensive," said Eric Lindenbaum, portfolio manager for emerging debt at Invesco in New York.
"You scratch your head and think...Turkey at 6 percent? But then what else will you buy? That's the kind of world we're living in where Western bonds are giving you near zero yields so you don't have that many options," he said.
"It's not the best reason to buy but at least in Turkey you have good fundamentals to back it up."
Analysts doubt local Turkish bonds can repeat last year's stellar performance, when they returned nearly 20 percent.
Manik Narain, an emerging markets strategist at UBS, predicts around 8 percent returns in 2013, roughly in line with the broader emerging market local currency debt sector.
"The vast majority of returns in local debt will be from coupon so you could expect 6.5 percent return on coupon and 1 percent on currency," he said.
"There is not really obvious room for Turkey's local debt market to outperform - foreign positioning is high, yields have compressed and there is lack of currency upside."
Foreign investment in Turkish equities has also risen. The stock market climbed 53 percent in 2012, making it one of the world's biggest gainers, and it has risen 8 percent this year.
Foreigners invested a net $5.3 billion in Turkish stocks last year against a net sale of $2 billion in 2011 and account for around two thirds of stock market capitalisation, according to data from the Istanbul stock exchange.
Bank of America/Merrill Lynch's January survey of global fund managers showed Turkey, China and Russia were the markets most favoured by emerging market equity investors, who have a net overweight of 43 percent in each of those markets.
"Last year the stock market performance was spectacular and it would be difficult to expect a similar performance this year," said Aziz Unan, portfolio manager at Renaissance Asset Management.
Turkish stocks are trading at 11.8 times forward earnings, a slight premium to global emerging markets. Earnings growth is expected to be around 11 percent this year, compared to 15 percent last year.
(Additional reporting by Sujata Rao in London, Dinesh Nair in Dubai; Editing by Nick Tattersall/Jeremy Gaunt)
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