Vanguard, the world's second-largest investment firm, recently decided to reengage with local currency government bonds in Türkiye, a senior portfolio manager at the company said Friday, after the country embraced more conventional policymaking since the May vote.
The U.S.-based asset manager, with about $8 trillion in assets, hailed changes in Türkiye's macroeconomic policies as "very positive," in the words of Nick Eisinger, co-head of Vanguard's Emerging Markets Active Fixed Income, responsible for the firm's active emerging markets strategy.
"We think this is a very positive series of developments, and our assessment is that it should be lasting rather than temporary," Eisinger told Anadolu Agency (AA).
After winning a reelection in May, President Recep Tayyip Erdoğan appointed a new economy administration that reversed yearslong easing policy and embraced a sharp policy tightening.
The policy shift aims to arrest inflation, reduce trade deficits, boost foreign investment, rebuild foreign exchange reserves and stabilize the Turkish lira.
The country's central bank delivered seven consecutive interest rate hikes totaling 3,400 basis points through December to tame inflation, which neared 65% last month.
The central bank has signaled that the aggressive rate hikes – which took borrowing costs from 8.5% to the current 42.5% – could soon end. Still, it pledged to maintain tight monetary policy as long as needed.
Vanguard bought Turkish local bonds without hedging late last year after Eisinger and a few other investors visited the country for meetings.
"Policy shifts will feed through to improved fundamentals and an easier funding outlook for Türkiye. It will also pave the way for a return of foreign interest in local market/currency assets in Türkiye," Eisinger said on Friday.
Changes should continue
On Vanguard's investments in Turkish assets, Eisinger said: "We have always held Turkish sovereign credit in our portfolios and more recently have decided to engage with local currency government bonds given the moves in interest rate policy from the central bank, the future inflation path, and the fact that Turkish government local bonds are very under-owned by foreign investors."
He said the firm sees the external funding situation improving as higher rates have seen a reduction in dollar deposit liabilities across the banks and are allowing the central bank to rebuild gross and net reserves.
International reserves of the Central Bank of the Republic of Türkiyh (CBRT) in the week ending Jan. 12 totaled $139.8 billion, after hitting a record high level of over $145.5 billion on Dec. 15-22.
Eisinger underlined that the current path of monetary and regulatory policy changes in the country should continue.
"Over time we should see inflation ease which may allow the central bank to move interest rates back down, but this should not be premature," he noted.
Inflation is expected to increase further in the coming months after a nearly 50% rise in the minimum wage and peak around 70%-75% in May, before falling in the second half of the year.
The government see it falling to 33% at the end of this year, before dipping further to 15.2% in 2025, and 8.5% in 2026, according to its medium-term program, unveiled in September.
International rating agencies, including Fitch Ratings, S&P Global, and recently Moody's, have all revised their outlooks on Türkiye.
Moody's last Friday revised Türkiye's outlook to positive from stable, citing the decisive change to the country's monetary policy. It maintained the rating on Türkiye's government debt at "B3."
Fitch Ratings lifted Türkiye's credit outlook to stable from negative in September. It affirmed its debt grade at "B."
In December, S&P Global Ratings raised the country's rating outlook to positive from stable and affirmed its sovereign rating at "B."
"The country most likely will receive credit rating upgrades in the near future, although we do not envisage a return to Investment Grade rating status for some time," Eisinger said.
"As an active bond manager, the ratings are not especially important for us from a fundamental perspective, although they can influence inflows, especially when ratings move from non-investment grade to investment grade or vice versa."
Recent data by the Institute of International Finance showed foreign investors added some $5.4 billion in exposure to debt and equity portfolios in Türkiye in the last two months of last year, the largest such inflow in five years.
Alongside Vanguard, another U.S. investment giant, Pimco, also said it returned to the Turkish market and bought local Turkish assets recently, betting that the country will maintain high interest rates.
The foreign interest is primed to grow, drawn by potentially outsized bond returns. Amundi, Europe's largest asset manager, has also taken a more bullish position on Turkish assets, Reuters reported.
Wall Street bank JPMorgan said Türkiye's lira was a key emerging market bet for 2024, while UBS recommended clients take a "tactical long" position on the currency in November.