Turkey Gets an Upgrade
September 23, 2011
The International Monetary Fund (IMF) offered a sober assessment of the global economy this week when it released the September 2011 update of its World Economic Outlook. The IMF stated the global economy is in a “dangerous new phase,” citing two main downside risks: The possibility the crisis in the eurozone will be too much for the region’s policymakers to handle, and soft economic activity in the U.S. is due to a weak housing market, deteriorating financial conditions and a political impasse regarding fiscal consolidation.
Accordingly, the IMF cut its projections for global growth to 4 percent through 2012, down from over 5 percent in 2010. Unlike in recent years, both advanced and emerging markets face an uncertain landscape in the months ahead.
One strategy we use to find worthy investments in uncertain markets is to evaluate countries and markets based on their strengths and weaknesses. While countries such as the U.S., Spain, France and Japan struggle to light the fuse of economic growth, countries such as Turkey have emerged from the global crisis ready to take the next step.
Just last week we discussed how unorthodox policy moves by the Central Bank of Turkey have had a positive effect on the country’s economic growth—Read: Turkey’s “Cut Rate” Path to Growth.
This week, Standard & Poor’s (S&P) rating agency increased Turkish lira-denominated bonds’ credit rating two levels to an investment grade rating of BBB-. In addition, S&P confirmed Turkey’s foreign exchange credit rating just below investment grade at BB. The rating agency also stated its positive outlook on Turkey, which could mean additional upgrades from S&P on different areas of the Turkish economy are on the horizon.
A bond is considered investment grade when there is a relatively low risk of default. In contrast, bonds below investment grade, or “junk bonds,” carry a higher risk of default and come with higher price tags. Moving from “junk” status to investment grade opens the door to a substantial amount of new investors.
Historically, achieving investment grade status has provided a strong boost to investor sentiment and equity markets. Research from Deutsche Bank shows equities in Romania, Brazil, Bulgaria, India and South Africa outperformed emerging market peers, some of them significantly, during the month following an upgrade.
Markets also have historically received a boost in the months leading up to an upgrade. Deutsche Bank says “markets that were lifted to investment grade by any of the major agencies outperformed the benchmark MSCI Emerging Markets Index by a noteworthy 24 percent in a one-year horizon before the rating decision.”
The average return during the year following an upgrade was 6 percent. This could provide a much needed jolt for the Istanbul Stock Exchange, which has lagged its MSCI Emerging Market peers by roughly 13 percent in 2011.
It will not be easy for Turkey to climb the wall of worry plaguing global markets but we think strength in the country’s domestic economy will aid in that process. Just last quarter, private investments in construction, retail trade, transportation and communication fueled a 7 percent increase in industrial production from the previous quarter, according to a report issued by Bahççe?ehir University’s Center for Economic and Social Research.
In addition, S&P also said that Turkish banks are optimally capitalized. While government budget deficits across the eurozone widen, Ata Invest research points out that Turkey posted a surplus government budget in August.
The investment grade rating and positive domestic economic news should help Turkey attract foreign investment and continue the country along the road to a growing economy.
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The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Istanbul Stock Exchange National 100 Index (XU100) is a capitalization-weighted index composed of National Market companies except investment trusts.
- Chart of the Week – Turkey’s “Cut Rate” Path to Growth
- September 15, 2011