Nearly a year ago, President Recep Tayyip Erdoğan, having just won the election, endorsed significant interest rate hikes to combat soaring inflation. This marked a departure from years of unorthodox monetary policy that had deterred investors.
Since June of last year, the central bank has increased its policy rate by a total of 4,150 basis points. At its latest policy meeting, the bank maintained the main interest rate steady at 50%, as anticipated, while staying cautious about inflation risks.
Vanguard and Citi investing in Turkey
Nick Eisinger, co-head of Emerging Markets Active Fixed Income at Vanguard, which has more than $7 trillion in total assets under their management, said: "Investors are getting back in quite aggressively now – the numbers are really strong. There's been a lot of inflows.”
Referring to Turkey’s hard-currency debt, Eisinger said: "We're long on the Turkish Lira. We're long on the local bonds, but not a lot, and then we're quite long on the credit."
Luis Costa from Citi agreed with Vanguard’s remarks, stating that the policy shift had stimulated interest in Turkish assets. Costa said: "We see the current moment as somewhat of a renaissance for Turkish markets across local, external, corporate credit and equity markets."
Returns on Turkish government bonds beat wider index
The rally in Turkish assets has been widespread. The main stock index has risen over 46% since the beginning of the year, driven by an 80% increase in the banking sector over the same period.
Domestic government bonds have returned over 4% year-to-date, significantly outperforming the less than 1% return of the broader JPMorgan GBI-EM Global Diversified index.
Bonds saw initial foreign interest in November, which later cooled. However, interest was renewed after a 500 basis point interest rate hike in March and the opposition's success in the local elections on March 31.
Stabilising Turkish Lira
Turkey’s hard-currency debt has returned 2.4%, aligning with the broader JPMorgan EMBI Global Diversified index. Over the past 12 months, Turkey’s returns were at 24.6%, more than double the wider index's returns.
Although the Turkish Lira has weakened by over 8% against the dollar since the start of this year, it has stabilised since mid-April.
With monetary conditions tight and de-dollarization underway, Vanguard’s Eisinger said: "In real terms, the currency appreciates, which is a good thing, and they want to do that because it's a good anchor to cut inflation."
Regarding stocks, Citi has adopted a neutral stance on banks following the strong market share rally. Alparslan Çakar, Chairperson of the Turkish Banks Association, stated that the banking sector is strong, with no issues in asset quality and a low non-performing loans rate.
Looking towards the future
Looking ahead, CDS, which are instruments used to insure exposure against an issuer's default, could be the next major trade for investors, according to Eisinger. Currently, Turkey’s five-year CDS stand at 264 basis points, down from 673 basis points 12 months ago.
Eisinger finished by saying: "Turkey's CDS could easily be 225 if they get it right – that's a big trade. If you put that on in size and they get that right, that's a big deal."
What this means for Turkey’s real estate ‘Buy Zone’
According to industry experts and future projections, Turkey is now entering a ‘Buy Zone’ ahead of the next significant wave of investment, which will impact various sectors, including the real estate market.
Cameron Deggin, CEO of Property Turkey Group, said: “The current monetary policies are achieving their targets with signs of inflation decreasing due to interest rate hikes. This aligns with our previous predictions that liquidity will return to the markets in the first quarter of 2025, reopening the domestic market and triggering a further influx of foreign investment in Turkey.”
Deggin finished by saying: “This will create a ripple effect on Turkish real estate prices, particularly in affordable city centre locations and urban regeneration projects focused on providing entry-level homes to the masses. These are the segments that investors should look out for."
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