If there is one thing that can be relied on in this sector, it is volatility and unpredictability – and Turkey has provided both in spades. What it has crucially also afforded, however, is an element of liquidity that far outstrips that available elsewhere, and this, coupled with a wide selection of fare on offer – most notably on the bonds side of the equation – has made it a destination of note.
From an economic point of view, Turkey is underpinned by fairly robust fundamentals. Output, for example, grew by a stronger-than-expected 4% in 2015, driven by strong consumer spending figures, while an oil price that is still languishing at a relatively low level benefits it in its status as a net importer.
A dovish stance from the Federal Reserve in terms of US rate hikes has also helped when it comes to financing its current account deficit.
But even some situations that could at first glance appear to be negatives have proved themselves otherwise – or at least not as dire as feared.
Sanctions imposed by Russia following Turkey’s shooting down of one of its warplanes in November 2015 have been counterbalanced by renewed negotiations with the European Union over the role it can play in mitigating the refugee crisis – and the pay-off that might accompany it.
There is also a certain irony that many investors have been paying closer attention to Turkish opportunities because Russia itself is subject to sanctions imposed by the West, leading to a stagnation of supply.
From the start of the year to the end of April, the Borsa Istanbul 100 Index gained more than 20%, while the yield on 10-year lira-denominated government paper dropped to around 9% from over 10.50%.
After sitting out the first couple of particularly turbulent months, the sovereign raised two lots of US1.5bn in the bond market in quick succession, making a large dent in its international requirement of around US$4.5bn – a relatively low number, given that it had been taking opportunities to pre-fund over the previous two years.
Indeed, timing was of the essence, as the week after its second visit, prime minister Ahmet Davutoglu resigned, with the markets giving up almost half their gains in short order.
For investors, the relative liquidity of the Turkish complex meant they were able navigate around the situation, although it served to reinforce the importance of the political backdrop when it comes to performance.
One particularly bright spot has been the banking sector, where Turkey’s lenders have provided a constant flow of bonds throughout the year.
Starting with a conservative senior unsecured issue from state-owned TurkExim at the beginning of February, there was soon more esoteric fare on offer, with Kuvyet Turk printing a Basel III-compliant Tier 2 capital transaction just a week later.
This came at a time when core European banks were still summoning up the courage to issue, given the uncertain market environment, and it was followed by a similar trade from Yapi Kredi, with even much smaller institutions such as Alternatifbank also finding favour.
But their breadth of offerings did not stop there and they proved themselves more than willing to plough fresh furrows. This was exemplified by VakifBank’s mortgage-backed covered bond in late April, which opened up a new market, while a debut Green bond from TSKB is in the works.
Bank bonds aside, project finance has been another bright spot, with the market having evolved swiftly over the last few years and continuing to do so.
In fact, one of the few sectors to have proved disappointing in terms of supply has been equity capital markets, with no successful flotations of any size since November 2014. Even here, however, optimism in the future has not been completely dashed.
Hopes are that Turkey will continue on its reformist path. Foreign capital is ready to be deployed in one of the few areas that can offer a broad range of investment opportunities and a relative level of liquidity.
The political situation is one that investors will keep a wary eye on, although this is invariably an important part of the equation in any EM proposition.
The country has thus far provided a wealth of possibilities and will likely continue to do so. It may not be completely straightforward but it will at least be interesting.
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