LONDON Aug 2 Turkish stock and bond markets
have delivered world-beating returns this year to investors who
have come to see Istanbul as an oasis amid the escalating
political tensions of the Middle East and the crisis in
Dollar-based returns on Turkish stocks are over 30 percent
so far in 2012, making it the best performing emerging equity
market after Egypt.
Local bonds have returned 17 percent in dollars, almost
double the figure for the broader emerging markets index.
Some of these stupendous market gains may be down to a
bounce back from a disastrous 2011, when Turkish equities fell
20 percent and the lira plunged 18 percent to the dollar.
But this year's improving balance of payments picture and
the perceived success of central bank policies have been the
Investors note that Turkey's massive current account deficit
has contracted by almost a third this year due to lower oil
import costs and a surge in exports. Inflation is expected to
end 2012 at almost half last year's levels.
While economic growth has slowed from last year's roaring 8
percent level, companies for the most part remain in good shape,
with banks seeing 15-18 percent loan growth and exporters
benefiting from last year's currency depreciation.
All this offers a stark contrast to its neighbours, the euro
zone as well as the Middle East.
"In the context of what's around it, Turkey looks in pretty
good shape," said Jeff Chowdhry, who helps run $4.5 billion at
F&C Investments. Chowdhry added to his position earlier this
year and has a double overweight on Turkish equities.
"It's a country with high nominal interest rates and
relatively stable political environment and that is attracting
Foreign fund managers have poured almost $8 billion this
year into Turkish bonds, central bank data shows, while stock
markets have taken in a net $2 billion.
According to Bank of America/Merrill Lynch's monthly survey,
Turkey was investors' second-biggest overweight position in
emerging markets last month after Russia.
Turkish bonds have benefited from yield-seeking investors'
mass stampede into emerging debt, triggered by the fall of
German and U.S. yields into negative or near-zero territory.
That includes Japanese retail investors who have poured a
record $2 billion into Turkey via special bonds called uridashi.
"There is a desire globally to lap up the yield Turkey has
to offer, especially as easing inflation and the current account
deficit have strengthened central bank credibility," said Manik
Narain, emerging markets strategist at UBS.
"Within emerging markets Turkey offers some of the highest
FLOWS AMID TURMOIL
The gains come at a time of an increasingly bloody uprising
in neighbouring Syria, turmoil in Egypt and renewed speculation
over whether Israel will make a military strike against Iran.
For Turkey, which imports 95 percent of its energy needs,
the worry is of another oil price shock that would blow out the
current account deficit again, push up inflation and slow the
economy further, hitting consumption and company profits.
Turkey's army this week held tank exercises on its eastern
border, highlighting its unease over a Syrian power vacuum that
could embolden its own 27-year Kurdish separatist movement.
Such an escalation in political risk would in the past have
sent shock waves through Turkey's financial markets. Yet
investors' cost of insuring exposure to Turkey via credit
default swaps has actually fallen by over a third this year.
To many, that is evidence of investors' faith in Turkey's
economy and its Islamist-rooted, conservative government.
"Investors have found it has paid in recent years to fade
any political developments in Turkey. Markets are less concerned
about political upheavals than they used to be," Narain said.
Turkey may even be benefiting from the turmoil in its
neighbourhood. For instance, the fall in its trade deficit is
partly due to the bumper gold exports to sanctions-hit Iran.
Iran was the biggest single destination for Turkish exports in
June, taking in almost 500 percent more than a year earlier.
Gulf cash is also pouring into Turkey.
"Before the euro zone debt crisis began many Arab investors
wanted to invest in Europe and the United States," said an
executive at an Islamic Bank in Istanbul.
"Now some of these investors have turned to Turkey."
(Additional reporting by Alexandra Hudson in Istanbul; Editing
by Nick Tattersall)