With interest rates being at all time low and the Federal Reserve undertaking Operation Twist whereby $40 million of fixed income securities (MBSs) are purchased indefinitely, investing in the bond market might not seem too attractive. Bond prices move in opposite direction of interest rates – so if you’re long the fixed income market you are betting that interest rates will decrease, hence increasing the value of the bond you hold. Given the low interest rates environment, investors should be looking at higher yields in non -US sovereign debt. Our top- down approach will direct us where in the world we want to invest. Destination -> Turkey
- · Population : 75 million
- · GDP Growth : 8.5% (2010 – 2011)
- · Stock Exchange Growth : 310%
- · Financial Sector Assets (241$ billion in 2006, 710$ billion in 2012)
- · Credit Rating : BB+ (Fitch) Ba1 (Moody’s) BB (Standard and Poors)
As we have previously mentioned in our weekly reviews, we have been closely watching Turkey’s economy. Istanbul is slowly becoming an international finance center as the country’s GDP growth was 8.5% last year – one of the fastest among major economies. Turkey has a youthful population ( half the population is under the age of 29) and is relatively politically stable when compared to other emerging markets. In June 2012, Moody’s Investors Service upgraded Turkey’s government bond ratings to Ba1 from Ba2 and has continued to maintain a positive outlook. Turkish banks prove to be overcapitalized with a capital to risk assets ratio of 16.5% (more than double of what's legally required).
Turkey’s local-currency bonds have returned 13 percent this year compared with 9 percent for Russia according to JPMorgan Chase & Co. indexes. Brazil and Turkey offers investors the highest yields on their two-year debt among 18 emerging markets tracked by Bloomberg. Turkey’s record high current account deficit (imports>exports) shrank to its lowest in 3 years to $1.18 billion from 4$ billion. which reflects lower demand combined with an increase in gold exports. The decrease in imports represents a decrease in consumption which in turn will result in the the government stimulating the economy and lowering rates - the cost of borrowing. Rate cuts of at least 50 bps are expected in the upcoming weeks. The bank already cut the gap between its overnight lending and borrowing rate by 150 bps in September and hinted that it would continue its rate cuts to support growth.
Foreign Direct Investment has also been rising. Turkey’s growth has been noticed particularly by Japan who has substantially raised its investment in Turkish debt. Japanese investors have invested over $3 billion funds in Turkey in 2012. Mizuho Financial Group Inc. and Mistubishi Corp opened offices this past year.
Sector --> We recommend investing in Turkey’s energy producers. Turkey is an important energy corridor in Europe connecting East and West. The Turkish Electricity Transmission Company estimates that Turkey’s demand for electricity will increase at an annual rate of six percent between 2009 and 2023.
Company --> Aksa Enerji Uretim (AS) is Turkey’s biggest nongovernment power producer. Aksa has a target of $1.1 billion of revenue this year. Aksa Enerji has acquired rights to extract an estimated 39 million metric tons of brown coal, or lignite, in the area for 35 years. Also, Goldman Sachs has a 13% ownership in the company.