Bears Retreat From Turkey Stocks as Real Returns Draw Buyers

(Bloomberg) -- Turkish shares have just posted their best month since January, and there is at least one sign that investors are betting on the good run continuing.

The cost of hedging against declines in the largest exchange-traded fund tracking the nation’s stocks has slumped to the lowest since mid-April, data compiled by Bloomberg show. The 11% gain in the iShares MSCI Turkey ETF last month was accompanied by an increase in volumes, both in the fund’s securities and its related options.

The benchmark Borsa Istanbul 100 Index rose 8.6% in September, the most since January’s 14% jump. The gain in the New York ETF reflects the view that relative real rates of return in Turkey are becoming alluring, according to Julian Rimmer, a trader at Investec Bank Plc in London.

“The main -- some may argue the only -- pillar supporting the Turkish market is its high real rates of return which, as global growth assumptions continue to lessen, make its currency an attractive carry-trade,” Rimmer said in emailed comments. “Declining interest rates in Turkey then, underpin the market. That international investor positioning was either very low or non-existent is also a significant contributory factor.”

After 750 basis points of benchmark interest-rate cuts in his first two meetings, Turkish central bank Governor Murat Uysal said last week the reductions were “front-loaded,” and that the bank has limited policy space. That’s a clear signal to some that the pace of easing will moderate under a governor who in late July vowed to preserve “a reasonable rate of real return.”

While Turkey’s current real rate of return of 1.49% is lower than the average of major emerging markets, inflation is projected to continue decelerating. The 12-month estimate of 12.2% in the central bank’s latest survey would give Turkey a real rate of return of about four percentage points, more than 100 basis points above its peers.

With volatility in the lira tamed for now and the carry trade drawing investors, money managers can focus on stock-specific developments and the valuation advantage Istanbul shares have over other emerging markets. That may explain investors’ recent drive to pour money into the ETF.

After a two month lull, the ETF has started attracting strong inflows, with investor purchases accelerating to the fastest pace in more than a year on Tuesday. Short interest as a percentage of shares outstanding in the ETF dropped to a one-month low, IHS Markit Ltd. data showed.

“Sentiment is improving and valuations are compelling,” Rimmer said. “Some of the geopolitical tensions which scuppered the first-half performance have also diminished, so there’s a confluence of positive agents.”

--With assistance from Constantine Courcoulas.

To contact the reporter on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Paul Jarvis

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