Pictet Asset Adds Turkish Lira, Bonds to Portfolio as Investor Confidence Builds

(Bloomberg) -- Pictet Asset Management Ltd. is making Turkey one of its top trades as it sees the country making progress in curbing high inflation.

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Investor support for Turkey’s debt and currency has been building over the past three months through “ongoing discussions with policymakers, signaling from the markets, and the local elections, which saw the opposition performing,” said Mary-Therese Barton, Pictet’s chief investment officer for fixed income. The money manager has an overweight view on the lira and started buying local bonds in the 2- to 5-year part of the curve.

“We have slowly started to increase our exposure to rates as we see increasing evidence that the inflation is likely to print lower in terms of its momentum over the coming months,” Barton said in an interview in Hong Kong. Foreign inflows should also contribute to the currency “finding its balance and boost the carry trade of being long the lira,” Barton said.

A year since Turkey steered away from policies that favored economic growth over price stability, once-jaded investors are starting to trust finance minister Mehmet Simsek, who enjoys credibility. His efforts to attract foreign investors may finally be paying off as inflows into lira assets build.

Turkish assets have risen since last year’s election, with improving appetite for risk. Even though the lira has fallen more than 10% this year, the third-worst performer among its peers, the county’s 5-year CDS dropped more than 500 basis points from its peak last year to around 280 basis points.

For many investors though, bad memories of past events linger. In 2021, then-central bank governor Naci Agbal raised the key policy rate sharply, but was fired by President Erdogan after four months. That led the country to rely on more unorthodox economy policies, which made its assets less appealing for foreign investors.

“Uncertainty is high after so many years of loss of anchor, so we will take our cues from the data,” Barton said. Continued decline in domestic demand, restrained credit growth and government support on disinflation is key, she said. “Despite our optimism, we remain vigilant.” Pictet Asset is reducing some of its exposure to Latin America to add more Turkey holdings.

The Turkish central bank held its key policy rate at 50% on Thursday, reiterating that its stance will remain tight “until a significant and sustained decline in the underlying trend of monthly inflation,” according to a statement.

Policymakers “will be cautious and wait to see several inflation prints to be sure that to be sure that run rate of inflation is in their expected band, which we believe can happen closer to the year-end,” said Alper Gocer, head of emerging markets fixed income in London.

(Updates with additional context in paragraph 5.)

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