Investors in Turkey were rewarded Monday with a jump in prices of equities and fixed income instruments across the board. Comments over the weekend from Federal Reserve representatives point to a delay in any interest rate hikes in the near term, news which bodes well for Turkey and other emerging markets. The Turkish lira and the benchmark BIST-100 equity index were up on the news and government bonds all rose sharply in anticipation of continued accommodative policies out of Washington.
The BIST-100 equity index surged up over 2 percent trading at 75,050 points at midday Monday. The index had traded as low as 72,850 points last week after trade resumed following the Eid al-Adha holiday. This appears to be the bottom for the equity index as investors appear to have shifted course back into emerging markets.
Commenting on the reversal of fortune for global emerging market investors, Emrah Ahi, known in Turkish financial circles as the "Turkish bond king," addressed the recent developments. "Global markets are in a turbulent state due to growth concerns. But this phenomenon will be beneficial for Turkish markets in the medium run. These slow growth projections dragged developed bond market yields to low levels [like U.S. 10-year bonds trading at 2.28 percent and German 10-year bonds trading at 0.88 percent]. This creates a positive mood for Turkish bond and equity markets. These levels offer a very lucrative opportunity for investors that can tolerate short-term volatility for both Turkish bond and equity markets."
Ahi's comments were echoed by Turkish bond investors who pushed down yields of Turkish government issues across the board. The inverse relationship of yield/price in bonds means that the prices increased as the yields decreased. The benchmark two-year bond was down to 9.24 percent and the long-end 10-year bond traded at a yield of 9.1 percent near closing on Monday. These yields are in contrast to the 9.63 percent and 9.51 percent respectively that bonds had traded at last Wednesday. Such a jump in bond prices continued to improve the balance sheets of bond-heavy investors, such as Turkish banks.
Insurance against political and economic instability for Turkey was also cheaper on Monday, trading at the 1.98 percentage level, down over 1 percent on the day. This will probably be a peak for CDSs for Turkey in the coming months as the need to dismantle the ISIS terrorist network has now been widely accepted and governments are working closely to begin a full-on assault on ISIS's capabilities. Although a prolonged conflict may not be on the horizon, the resolve to do so is at an all-time high which should speed-up the process. It appears that domination of most of Iraq and Syria by ISIS is already priced into markets, meaning any progress in dismantling ISIS would translate into gains in financial markets.
The Central Registry Agency's (MKK) foreign participation in the Turkish equity markets index was down 16 basis points to the 62.91 percent level, a multi-month low. This too should be the minimum level of the participation rate in the near term as investors, previously spooked by Federal Reserve comments, will weigh the new information which should move them back into emerging markets such as Turkey.
The Turkish lira is also higher against the U.S. dollar as are many other emerging market currencies after the Fed's news . The lira traded at 2.26 Turkish liras to the U.S. dollars, stronger by over 2 percent in recent days. With the decline of oil prices and the strengthening lira, the consumer-consumption-reliant Turkish economy should see a few basis points added to growth numbers by the end of the year.
Balance of trade numbers as well as unemployment data is scheduled to be released Wednesday with no major surprises expected. The war against ISIS should continue to dominate the news cycle in the region and until major battles are won, markets will be hesitant to continue the run-up they had experienced in the last year. Despite these reservations, I predict regional markets, especially Turkey, will still enjoy healthy returns by the end of the year.
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