Schroder Real Estate Investment Trust Ltd

Bloomberg

The Year of Drama in Turkey gives investors these 2021 priorities

(Bloomberg) – It was a turbulent year in virus-ridden global markets, but investors in Turkey had more drama to deal with than most. The lira’s slump was the sharpest in emerging markets after the Argentine peso and regulators made investors uncomfortable with market intervention, including short-selling restrictions, which helped stimulate record outflows. Geopolitical risks were also abundant due to Turkey’s stance on energy exploration in the Eastern Mediterranean, the conflicts in Syria, Libya and between Armenia and Azerbaijan and the purchase of a Russian air defense system. The biggest jolt of all came in November with a revision of Turkish economic management, accompanied by a commitment to investor-friendly decisions. After the numerous twists and turns in 2020, the country – and investors – need strong economic policies, good international relations and central bank independence next, said RAM Capital SA money manager Ogeday Topcular. “Even if these things happened, it would be a long-term process and ongoing effort to undo the damage to credibility,” Topcular said. “In 2021, the main focus will be on following up on recent promises.” Here are a few areas that will be central to money managers and strategists in 2021: Central bank policy President Recep Tayyip Erdogan promised to restore investor confidence after his son’s departure. Tsar-in-law and economic czar Berat Albayrak and the overthrow of the central bank governor Murat Uysal, even if this meant swallowing “bitter pills”. This led to a rally in Turkish assets, but investors will remain skeptical and want to see in the short term, according to Paul Greer, a money manager with Fidelity International in London, macro imbalances remain a concern as macro imbalances remain a concern. The central bank’s new governor, Naci Agbal, said on Wednesday that he would tighten policies if the price justifies it, investors are concerned about the turnaround in Turkish monetary and fiscal policies in recent years, said Cristian Maggio, head of emerging markets Markets at TD Securities in London. The central bank can further raise interest rates in a conventional response to inflation. “However, I believe that at some point President Erdogan will try to reset monetary policy,” in order to be accommodative and growth-enhancing, even if it jeopardizes long-term price stability, Maggio said. He predicted that investors might notice a change in policy direction in the second half of 2021. Rebuilding Reserves Turkey has spent its foreign currency holdings faster than any other major developing economy this year, and their drop to a 15-year low was at the heart of the lira’s collapse. A recovery will require either higher interest rates or an optimistic sentiment that will fuel foreign capital inflows. Turkish authorities could focus on rebuilding reserves during times of lira strength and restoring investor confidence through reduced regulation to attract portfolio funds, said Phoenix Kalen. Agbal said on Wednesday that the director of emerging markets strategy at Societe Generale SA in London will be a key element of next year’s policy mix to build currency reserves without destabilizing the lira. A detailed plan of how and when reserves can be built up will be announced later. Inflation Thanks to the weak lira, inflation remained in double digits throughout the year and rose faster than expected in November, which increased the pressure on Agbal to continue with a tighter monetary policy: “Inflation remains a thorn in the side, and the independence of the central bank is also something no one should take for granted, “said Maggio of TD Securities. “We will be watching closely how good it will be to get inflation back on target.” De-Dollarization Closely related to the problem of inflation is the Turkish preference for dollar-based assets to protect their savings. By December 4, the foreign exchange deposits of Turkish residents had risen by almost 19% to $ 231 billion that year, according to the central bank. This follows a 20% jump in 2019, despite Erdogan urging citizens to use the local currency for transactions and investments. With a new economic team and optimism about an improved global risk sentiment, one more thing could help the local currency: said Rabobank strategist Piotr Matys. “The missing component that would give the lira more upward momentum would be profit-taking on long US dollar positions in Turkish households and businesses,” he said. However, the Turks are unlikely to loosen their hold on the hard currency as long as they have doubts about the stability of government policy, said Mehmet Gerz, chief investment officer at Ata Portfoy. US-Turkey relations A major dispute worsening Ankara-Washington relations could “undo the benefits of more orthodox monetary policy,” said Henrik Gullberg, emerging market macroeconomist at Coex Partners Ltd. in London. Relations between NATO allies have been weighed down by the purchase of Russia’s Russian S-400 missile system, the detention of a US pastor, US sanctions announced this week, and a New York criminal case against a Turkish state bank. President Donald Trump and Erdogan seemed to get along well until those measures signed against Turkey. President-elect Joe Biden has called Erdogan an “autocrat” and said the US should support opponents who want to oust him at the ballot box. Even so, Rabobank’s Matys is one of those who doesn’t expect Biden to take an immediate hostile stance: “It’s reasonable to assume that Biden will give diplomacy another chance at the beginning of his presidency,” said Matys. Vaccine and TourismForeign According to the Ministry of Tourism, tourist arrivals decreased by more than 70% in the first 10 months of 2020. Good news about Covid-19 and its treatment is urgently needed, said Onur Ilgen, Head of Treasury Department at MUFG Bank Turkey. “Using vaccines effectively and slowing the pandemic will be critical factors in macroeconomics,” he said. The availability of vaccines may not save the next tourism season, “but there is a possibility of a positive surprise,” said Viktor Szabo, senior fixed income manager at Aberdeen Asset Management in London. (Adds central bank governor comments in sections on central bank policy and reserve rebuilding.) For more articles like this, visit bloomberg.com. Sign up now to keep track of The Most Trusted Source for Business News. © 2020 Bloomberg LP