Foreigners Buy Most Turkey Assets Since 2018 After Rate Hike

(Bloomberg) -- Foreigners have purchased the most Turkish bonds and stocks since the start of 2018, attracted by the boost to yields from a surprise rate increase. But analysts and traders said geopolitical ructions make it unlikely that the inflows will last.

Overseas investors purchased $610 million of Turkish bonds and equities in the week that ended Oct. 2, according to the latest central-bank data. That’s the largest inflow since January 2018, coming in a week that saw the lira hit record lows, even after the central bank raised rates when most economists predicted no change.

Many investors were underweight Turkish assets, or had pruned back their positions during the summer months, and it appears that they’re now dipping their toes back in the water, said Nigel Rendell, a London-based analyst at Medley Global Advisors. “However, as events over the past few days have shown, Turkish investments are really only for the brave, or for those who have an uncanny knack of timing their buy and sell orders to perfection,” he said.

Lira investors have again been confronted by a flare-up in regional risks in the past two weeks, with Turkey opposing Russia-backed Armenia in its fighting with Azerbaijan, while at the same time planning tests of Russian-made S-400 missiles in defiance of U.S. complaints. Turkey is also pushing its own agenda in the eastern Mediterranean, putting it at odds with European Union members Greece and Cyprus, adding to factors keeping the pressure on the lira.

Given the sell-off in the currency, “those who piled into Turkish assets in recent days may now be getting cold feet,” Rendell said. The lira tumbled to its latest record of 7.9576 per dollar Friday.

The recent buying by foreigners contrasts with the overall pattern for this year, with their net sales of Turkish bonds and stocks reaching $13.4 billion so far, while their share of local-currency government debt remains near an all-time low at 4.1%.

For Julian Rimmer, a trader at Investec Bank Plc in London, the central bank’s 200-basis-points rate hike on Sept. 24 may have given some foreign investors the courage to resume purchases of Turkish assets, thinking that is signaled that “perhaps more conventional monetary policies would be pursued.”

He agrees with Medley Global’s Rendell that geopolitical risks are likely to outweigh promising short-term signals, such as the central bank’s action.

“The foreign-policy adventurism is playing very badly for the international audience and that uptick in interest will turn out to be a blip unless the government takes a more conciliatory, negotiations-based approach to diplomacy,” Rimmer said.

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