Cherry-picking through Turkey’s gloom: The funds staying put while others flee

May 31, 2019

By Tom Arnold

LONDON (Reuters) – While Turkey’s economy flounders, some foreign funds are buying into everything from fizzy drinks firms to automakers to banks as they winnow out likely survivors in the country’s beaten down corporate bond and equity markets.

Many overseas investors and macro-focused asset managers are pulling out, alarmed by a combination of a falling lira, high inflation, monetary policy missteps and a damaging standoff between President Tayyip Erdogan’s and the United States.

But with Turkey’s main equity index down 4% this quarter, others are cherry-picking based on a different range of criteria, including companies’ exposure to foreign markets, debt levels and relations with Erdogan.

Germany-based Union Investment, which manages around 343 billion euros ($380 billion) globally, bought into dollar bonds belonging to Coca-Cola’s Turkish bottler Icecek (CCI), and conglomerate Koc Holding. The sellers were international investment banks.

“We’ve seen the trade fears and volatility …and usually it’s a very good opportunity to get some bonds, to do some bottom-fishing,” said Sergey Dergachev, senior portfolio manager at Union Investment, who was satisfied with the 5 to 6 percent yield offered.

“I’m a long-term investor and long term we are quite positive on Turkey because you have a young population and huge disparity between the top corporates issuing bonds with strong corporate governance (and) strong risk management.”

Many investors choosing such names cite their low levels of debt and healthy cashflow, allowing them to withstand the lira slump and a recession-plagued economy.

They’re also favored because they’re large exporters. CCI exports to several former Soviet and Middle Eastern countries.

“The overall thesis is the economy is weak and will remain weak …and the export sector has become more competitive,” said Julian Mayo, chief investment strategist at investment management firm Fiera Capital.

He favors Turkey’s only refiner Tupras, carmaker Tofas, a joint venture of Koc Holding and Italy’s Fiat, and household appliance maker Arcelik.

Financial adviser Lazard Asset Management already has overweight exposure to Turkish equity and is considering adding to its holdings. “Along with Russia, Turkey is the cheapest market in the world among significant markets,” said James Donald, its managing director for emerging markets equity.

“…When you discount the risks we think there’s still value… If the currency improved we might add other names with exposure to the domestic economy.”


Economic risks include a prolonged recession or sovereign default, while business relations with Erdogan and the Islamist-rooted AK Party constitute a political one.

Links between Koc Holding’s eponymous family owners – prominent among Turkey’s secular business elite – and the AKP have at times been testy, with some companies in its portfolio, including Tupras, in the past hit with fines.

“This a highly politicized situation where friends of the government are spared… and larger banks and larger companies (that) have a history of opposing Erdogan will probably take the brunt (of economic adjustments),” said Jan Dehn, head of research at emerging markets investment manager Ashmore Group.

Many banks have been hobbled by a build-up of bad debt linked to the slumping construction and energy sectors, while Erdogan has harangued the sector for not cutting borrowing costs.

But some see value.

“We have an acquisition in some of the private sector banks but at a senior level (that)… looks quite interesting in terms of value,” said Filippo Alloatti, senior credit analyst at Hermes Investment Management.

He declined to specify those banks but highlighted Akbank and Garanti Bank as favored names, in part due to their conservative approach to risk management.

Their senior dollar bonds offer 7-8% yield, compared to 4.5-5% for the subordinated bonds of leading Brazilian banks, he noted.

“Turkey is not Brazil. It’s in a tough spot but if you don’t think they’re going to the wall then its quite interesting as you’re well compensated.” Alloatti said.

Dergachev’s Union Investment bought Akbank dollar bonds this month. “In terms of liquidity, even assuming there’s no rollover, they (Akbank) have liquidity for at least mid to end 2020, so they have good liquidity,” he said.

(Reporting By Tom Arnold; editing by John Stonestreet)

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