The financial landscape of 2024 presents a mixed bag – a potentially bullish year for emerging markets with the US Federal Reserve contemplating three interest rate cuts, yet the potential for this being overshadowed by high volatility. In this milieu of uncertainties, one unexpected frontrunner takes center stage: Turkish bonds.
Despite the recent record underperformance of the Turkish currency against the dollar, the nation seems poised for a soft landing, hinting at a potential market recovery in the latter part of the year.
While Türkiye’s inflationary struggles persist, the real action is unfolding in the country’s bond market, which offers a unique discount bonanza for discerning investors. There’s growing buzz about a bounce-back in this market in 2024.
Recent adjustments in Türkiye’s central bank monetary policy have spawned newfound interest in Turkish government bonds. Policy rates and local deposit rates have been adjusted to provide positive real rates compared to inflation expectations. The central bank has impressively raised the policy rate from 8.5% to 40%, reflecting a commitment to a sustained positive real-rate environment.
Despite Türkiye’s significant fiscal financing needs, the healthy cash balance in the country’s treasury and improved fiscal performance mitigate risks of oversupply. Projections indicate a potential influx of nearly $75 billion in investment if Türkiye gradually returns to historical ownership averages. This optimistic outlook aligns with Finance Minister Mehmet Simsek’s positive expectations, suggesting that Türkiye’s domestic sovereign bonds are likely to an attractive investment in 2024.
In the realm of emerging market bonds denominated in the local currency, Turkish lira-denominated bonds, often underestimated, are poised for a turnaround and could emerge as a top investment in the coming year.
It should be noted that inflationary pressures, high issuance volumes, and an anticipated additional 500 basis points in monetary tightening could entail Turkish bonds experiencing further volatility.
However, the Turkish central bank’s recent actions underscore its commitment to addressing economic challenges, eliciting a positive response from international investors cautiously re-entering the country’s domestic bond market. Sweeping economic reforms and a surge in yields have attracted approximately $860 million in lira-denominated government bonds. This renewed interest follows an economic policy overhaul initiated after President Recep Tayyip Erdogan’s re-election in May. Led by former Goldman Sachs banker Hafize Gaye Erkan, the central bank has raised interest rates six times since June, reaching a policy rate of 40%. This is aimed at curbing inflation that has exceeded 60%. This shift has led to a downturn in Türkiye’s local-currency bonds, but with yields now aligning with expected price growth levels, opportunities may arise for investors.
As 2024 begins, Türkiye’s debt capital markets are showing a remarkable recovery, in contrast to the cautious stance of international investors six months ago. The surge in interest is prompting Turkish borrowers in sovereign and corporate markets to expedite issuances. Exemplifying this newfound enthusiasm was a successful $2.5 billion five-year sukuk issued on November 7 for which demand reached over $7 billion, three times the issue amount. As high-quality asset managers and buy-and-hold investors re-engage, the question arises: how long can this positive momentum in Turkish markets be sustained into 2024?
As the country continues to grapple with soaring inflation rates, which reached 64.8% year-on-year in December, up from 62% in November, skepticism about the central bank’s ability to reach its 36% year-end 2024 inflation target persists. However, investors are cautiously eyeing potential opportunities in currency trades, particularly with the stabilizing Turkish lira, which, despite hitting a record low against the dollar, has seen its downtrend slow.
Recognizing the inevitable nominal depreciation due to high inflation, experts anticipate a less pronounced depreciation in the coming years and view Türkiye’s recent 500 basis-point interest rate hike as a positive move, expressing confidence in the country’s commitment to tackling inflation.
The country’s central bank actively encourages foreign investors to explore lira-denominated bonds, emphasizing the attractive high yields they offer. As the country approaches the final stages of its monetary tightening phase, the bank predicts a more moderate economic environment by the same time in 2024, with lower yields expected thereafter.
Despite the over 30 percentage points worth of rate hikes since June, putting the policy rate at 40%, Erkan sees this as an opportune moment for foreign investors. Acknowledging the increased interest from US investors in Turkish government bonds, she expressed a preference for direct investments over swap contracts, citing the limited impact on the country’s reserves. The governor’s comments align with signals from the Monetary Policy Committee suggesting a slowdown and the imminent conclusion of the ongoing monetary tightening cycle. While Erkan observed a decline in price increases across sectors such as the automotive and electronics segments, she highlighted persistent high inflation in education and housing, emphasizing the impact of supply shortages on the housing market.
In conclusion, as we anticipate economic shifts in 2024, the Turkish bond market emerges as a potential sleeper hit. Despite challenges, signs of resilience and strategic policy adjustments could position Türkiye for a market resurgence, making its corporate bonds a noteworthy investment opportunity in the months ahead. The year 2024 will be the year of Turkish bonds.
DISCLAIMER: NOT INVESTMENT ADVICE