Mar 31, 2023
Bond Traders Trim Bearish Turkey Bets on Possible Erdogan Defeat
(Bloomberg) -- Bond investors with bearish bets on Turkey are reassessing their views as a tightly contested election campaign threatens an end to President Recep Tayyip Erdogan’s two-decade rule — and his unconventional economic path.
Turkey’s dollar debt has outperformed all but one of its developing-nation peers this month as investors prepare for a possible reversal of Erdogan’s unorthodox policies, which have sparked the worst inflation crisis in decades and led to an outflow of international capital from the $905 billion economy.
Columbia Threadneedle Investments, which manages $584 billion, closed some of its underweight holdings in the nation’s dollar bonds this month after its London-based analyst, Gordon Bowers, returned from a trip to Istanbul and Ankara feeling “more constructive on the opposition’s rising odds” in the May 14 election.
There’s “much more optimism locally that Turkey is on the verge of regime change than the feeling is in the West,” Bowers said. “If the opposition wins, credit spreads have material room for spread compression as markets will front-run the medium-term fundamental improvements and ratings upgrades.”
The risk premium on Turkey’s dollar debt has narrowed 20 basis points this month to 456 basis points over US Treasuries, less than half of what similarly-rated Egypt pays, according to JPMorgan Chase & Co. indexes. Both are rated B3, six levels below investment grade, by Moody’s Investors Service.
Erdogan is facing the toughest election of his political career against the broadest-ever grouping of opposition parties. Polls predict a neck-to-neck race as the nation grapples with economic turmoil and a difficult recovery from a pair of devastating earthquakes in February.
But most investors aren’t ready to turn positive on Turkey yet, with even some of the most risk-inclined opting to stay away.
Read More: Turkey Is Shunned by Emerging-Market Hedge Funds Before Vote
Legal & General Investment Management Ltd. is neutral on Turkish sovereign debt for now, after covering its underweight position at the beginning of March.
“I would not go overweight until after elections because anything can happen,” said Uday Patnaik, the London-based head of emerging-market fixed income at the £1.2 trillion ($1.5 billion) asset manager. “An opposition victory could initially lead to a pop, but it will depend if Erdogan challenges the election outcome, etc.”
Gramercy Funds Management, a $5 billion emerging markets-focused investment firm based in Greenwich, Connecticut, said expectations of an opposition win are “overly optimistic.” The ability of joint opposition candidate Kemal Kilicdaroglu to defeat Erdogan likely hinges on “running an almost flawless campaign,” Gramercy’s team, including Chair Mohamed El-Erian, wrote in a note.
“We are skeptical of the odds of smooth sailing by the opposition,” they said. “Both the presidential and parliamentary elections gravitate around being a coin toss, in our view, and will be decided by small details during the first half of the second quarter.”
Turkey’s eurobonds are the “cleanest asset class to play the outcome in advance of the vote,” with local assets overvalued following years of interventionist and unorthodox economic policy, said Bowers at Columbia Threadneedle.
“If Erdogan remains, bonds will need to start pricing in higher odds of a financial accident or balance-of-payments crisis since I do not view a policy u-turn as likely in that scenario,” he said. “The next two months will feel like an eternity for both Turks and investors that are hoping for regime change.”
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