Temasek delegation scopes out Turkish assets

Fund managers in Turkey are hoping Monday's 10.5% plunge in domestic stock prices on the back of anti-government demonstrations this week does not dampen growing interest in the country from Asian investors.

The protest, which brought smoke and commotion to tourist hot spot Taksim Square, coincided with a visit by Singapore's Temasek Holdings. It is understood that the state fund has sent 45 people to Istanbul, presumably to scope out potential investments.

Temasek already holds Turkish assets, having last year bought a stake in Turkiye Halk Bankasi, the country’s second-biggest state-owned bank by assets, according to media reports.

The government fund, with S$198 billion ($159 billion) in assets under management as of March 31, 2012, declined to comment.

The benchmark Borsa Istanbul Stock Exchange National 100 index (BIST 100) fell to 76,984 points on June 3, in its biggest one-day drop since 2003. Stock prices now look more attractive, at around 10 times earnings, especially at a time when the country has entered a “golden era” characterised by a young population of 78 million with a median age of 29, with 50% described as “non-pension, non-children”, says Omer Yenidogan, CEO of TEB Asset Management. The firm is an Istanbul-based subsidiary of BNP Paribas Investment Partners.

In addition to Temasek, Japanese investors have shown interest in Turkish equities this year, Yenidogan says. This suggests their appetite for greater risk and foreign assets is growing beyond the typically large allocation to fixed income – as many predicted it would, on the back of a weakening yen and the new government's stimulus policies.  

For example, Sumitomo Asset Management, which runs a fund of funds focused on emerging market opportunities, has employed TEB as a sub-manager to help it invest in Turkish assets. TEB now manages around $550 million worth of assets on behalf of Japanese investors.

“Two years ago we used to come to Asia once a year; now we are here once a month to see Asian investors,” said Yenidogan, speaking on the sidelines of BNPP IP's Asia-Pacific Investor Summit in Singapore last week.

The hope for those in Turkey's $40 billion funds industry is that the demonstrations in Istanbul and capital Ankara – which started out as dissatisfaction over the government’s decision to pull down trees for commercial use and developed into discontent against the existing administration – would cause nothing more than a blip in domestic financial markets.

Asian institutions represent a fresh and welcome source of capital for a market that has until now been attracting largely European and Anglo-Saxon investors. Such investors have poured some $120 billion into local equity markets this year, says Yenidogan.

Fund houses such as TEB hope Asian investors will help drive growth in the local asset management industry, with retail participation estimated to account for 60% of AUM. The industry is expecting fund AUM to grow to $150 billion in AUM by 2023 from $40 billion.

The upgrade by rating agencies Fitch and more recently Moody’s, which raised Turkey’s government bond rating to investment grade (Baa3) last month, will certainly provide more comfort for international institutional investors to allocate more into Turkish securities.

“[We have] a fundamental story for both fixed income and equities, which makes Turkey a strong investment case. In fixed income, there are high nominal yields, and an appreciation risk when you look at the [Turkish lira],” says Yenidogan.

An expectation of an imminent reversal of US quantitative easing has been suggested as a key reason for the lira falling to a 17-month low against the dollar at the end of May. At press time, it stood at 1.88 to the dollar, and so not all participants in the market agree with Yenidogan that appreciation is likely, at least in the near term.

Aside from the country’s young population, low interest rates and inflation levels are likely to drive economic growth, he notes. Inflation is nearing the central bank’s year-end target of 5.3%, down from 6.13% in April. Meanwhile, the one-week repurchase rate has fallen to an all-time low of 5%, and there is expectation that the central bank will continue to loosen rates after starting to lower them in September to spur GDP growth.

“We had been a high-inflation economy for many years. I have been in investment management for over 20 years and this is the first time I have seen inflation and interest rates so low,” says Yenidogan. "Our inflation level is not 60% any more", referring to the inflation levels seen at the turn of the millennium.