Money managers are closely monitoring a continually changing situation in Turkey to see if the country's economic troubles can be resolved.
A combination of a trade spat with the U.S. — with the potential for further sanctions, high external debt and difficult internal politics have taken their toll on the lira, prompting managers to shed Turkish exposure in recent weeks.
As Pensions & Investments went to press Aug. 17, the lira had lost 7.76% against the dollar from Aug. 9 to Aug. 17 and 44.82% since the start of 2018.
But while managers do not anticipate a quick fix for Turkey's situation, they are not overly concerned about contagion risk to the rest of the emerging markets, nor to Europe.
Last week, Turkey's central bank launched measures to improve liquidity in the market, such as requiring banks to borrow at the — already available — higher policy rates. However, it stopped short of an official interest rate hike.
"The fact they resort to this rather than straightforward hiking to me is a bad sign — (the bank is) still worried about crossing Erdogan," said Craig Botham, London-based emerging markets economist at Schroders PLC, referring to Turkish President Recep Tayyip Erdogan's reluctance to embrace orthodox monetary policy. Mr. Erdogan has expressed his view that higher interest rates cause high inflation.
"The central bank still feels beholden to that frankly bizarre policy view, (which) is a concern. Although the measures have helped support the currency a bit, they haven't addressed the real" issues, and rather are acting as a stopgap, he said.
Turkey's interest rate was held steady at 17.75% at the latest meeting of its monetary policy committee in July. The rate on overnight lending was 19.25%.
Guido Chamorro, co-head emerging market hard currency debt at Pictet Asset Management in London, also acknowledged an "unwillingness to follow orthodox monetary policy ... Looking ahead, we don't really see any lasting solutions to those concerns — the fundamental concerns about the economy, from an inflation perspective and risk (to the) banks, have not changed from two weeks ago to now. And I think the geopolitical concerns are also still in place because of these disagreements between the U.S. and Turkey," he said.
There was "almost a sigh of relief when news came in that Qatar would invest $15 billion to help Turkey prop up their situation," said Joachim Klement, London-based head of investment research at Fidante Partners. Mr. Klement was referring to a pledge by Qatar to "rapidly implement an investment package," according to a notice on President Erdogan's website, Aug. 15.
"In my view that Qatari announcement, while it calms down the nerves, it doesn't really resolve the situation."
Money managers said they have been cautiously positioned when it comes to Turkey, and the country is top of mind for their investor clients.
"In the end the only thing in my view that can calm investors down is central bank (hiking of) interest rates in order to stop inflation and curb credit growth," Mr. Klement said. In July, inflation in Turkey hit 15.85% according to the central bank, up from 15.39% a month earlier and 9.79% in July 2017.
"I think what most of the market and investors would want to see is probably still a hike in interest rates, which doesn't seem to be forthcoming at the moment, and an improvement or easing in the relationship between the U.S. and Turkey — less aggressive statements from either side. But we just don't see those," Mr. Chamorro added. He said executives at the firm are most concerned about sovereign credit "because that's the channel that can be more dangerous if the banking system does start to get into some trouble."
Robeco Institutional Asset Management B.V.'s emerging markets equity strategy has not invested in Turkey for the last 18 months, said Wim-Hein Pals, head of emerging market equities at the firm in Rotterdam, Netherlands.
"We keep away from lira assets until we see more convincing measures from the Turkish government and central bank. Serious monetary tightening is necessary given inflationary pressures and current account worries. The government told investors earlier that capital controls are not being considered so that leaves hiking interest rates as one of the few options left. It is a confidence crisis which could end up in a financial crisis, which hurts the Turkish banks in the first place."