Amundi, the largest asset manager in Europe and one of the top ten in the world, has begun reinvesting in the Turkish lira, impressed by the country’s recovery efforts since the mid-year elections. The Paris-based company, which manages assets worth $2 trillion, is not yet ready to go all in given the continued decline of the lira, but it claims to have taken a first step in this direction by canceling long-standing bets against the currency.
Sergei Strigo, co-head of emerging market fixed income at Amundi, said that the 500 basis point rate hike to 40% in Turkey last week was “very positive” and a sign of the country’s seriousness in tackling the inflation problem.
“We started to cover our underweight in the Turkish lira a few weeks ago,” Mr. Strigo told Reuters, referring to the process of taking a more positive view of the currency.
“We are not yet ready to increase our allocation, but it is definitely on our radar.”
Having seen international appetite for investment in Turkey reduced to nothing by the near 85% fall in the value of the lira over the past five years, more positive steps by heavyweights like Amundi will be seen as a signal of hope.
Following his re-election in May, President Tayyip Erdogan has put in place a new cabinet and central bank which have sought to end years of unorthodox policies by adopting aggressive interest rate hikes. They have also begun to relax tight state regulations on financial markets in order to encourage investment and rebuild depleted reserves over the past few years.
Amundi, while being the first major fund to officially declare its change, is not the only one testing the waters, according to other foreign investors and bankers.
Investment bank JPMorgan has recommended forward foreign exchange transactions in recent weeks and according to some investors it and its rival Goldman Sachs are aggressively selling Turkish government bonds with maturities of 1 to 10 years.
The scars of Erdogan’s unpredictability – who has in the past four years in particular dismissed four central bank chiefs – mean, however, that international funds collectively hold less than 1% of lira-denominated government bonds.
“This could be one of the most interesting stories of 2024,” said Mr. Strigo, referring to a potential mass return of investor appetite if the policy change is confirmed.
For now, the forward foreign exchange contracts used by Amundi predict a further 40% fall in the lira, to around 40 to the dollar, over the next year, which Mr. Strigo considers unlikely.
Amundi’s tentative optimism is offset by the upcoming national local elections in March, during which fiscal recovery measures could divert Erdogan from his new policy direction.
“That’s probably the simplest way for now,” Mr. Strigo said about using forward foreign exchange contracts to express this balance.
Next year could be the time to start buying local currency debt, he added, but “local elections have always been the time when the fiscal position has to be relaxed to get the votes needed.”
Seeking to build confidence in the policy shift – and to convince skeptics that Erdogan supports it – central bank Governor Hafize Gaye Erkan will host the bank’s first investor day in New York on January 11.
With the bank having raised rates from 8.5% to 40% since June, Amundi believes that a further increase next month could finish the job.
“What is certain is that the lira as a currency, given the carry (interest rates on bonds relative to the rest of the world), is becoming much more attractive than it was before.”
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