The decision by the Turkish Central Bank to raise rates to 24% has helped stop the fall of the lira and has fuelled a recovery in both bond and equity markets — Turkey’s benchmark BIST 100 has risen by over 7% since the decision.
“This is the third major Turkey crisis that I have experienced in my investment career,” said Robin Kollannur, managing partner at RVX Asset Management. “The first was a banking crisis in 1994, and then a political and banking crisis in 2001. Both were pretty nasty in terms of lira depreciation and a market sell-off, which eventually led to a workout of the banking system and the need for IMF aid.
“We have seen this story play out before, and this one was not much different regarding the well-known issues around the country’s fiscal policies and a reliance on foreign capital.”
The decision by the central bank to hike rates suggested that the government is looking to defend the lira. And while structural reforms are still needed, particularly in its banking system, buyers are coming back.
“Turkish bonds are up about 10% this month, slightly out-performing Argentina,” said Christopher McKee, CEO of country risk ratings service PRS Group. “There is some recognition from buyers that things are improving.
“The worst might be behind us but the uncertainty isn’t over. Investors might be able, nonetheless, to now find some value in Turkey.”
Kollannur says that he has avoided Turkey so far this year, but believes, as was the case in 1994 and 2001, the right stocks can start to shine.
“The companies that will likely do well may have top-line revenues in foreign currency and a cost-base in lira; it’s even better if their debts are in lira as well,” said Kollannur. “If you can find that combination, those stocks should attract investor interest and in fact some have already started outperforming this quarter.
Nevertheless, investors are likely to remain wary as there remains a question whether the country’s central bank is actually independent or still heavily influenced by President Erdogan.