Credit Suisse Bank Cut Tempers Moody’s Optimism: Turkey Credit
Credit Suisse Group AG (CSGN)’s downgrade of Turkish bank stocks is sobering sentiment for traders counting on a sovereign upgrade by Moody’s Investors Service to prolong the best bond rally in emerging markets.
Credit Suisse cut its view on the country’s banks, saying lenders are “vulnerable to potential risk factors that the market has been neglecting,” according to an e-mailed report dated Jan. 25. The yield on the nation’s two-year notes rose for the first time in nine days, trimming the biggest rally among 17 emerging markets, as bank stocks tumbled.
While analysts predict that Turkey will receive a second investment-grade rating this year, underpinning more foreign inflows, Credit Suisse downgraded banks to neutral “after being positive for more than a year.” Moody’s is scheduled to hold a teleconference today, with “shifting closer to an investment-grade sovereign rating” among topics on its website.
“Moody’s will make Turkey investment grade and the momentum will continue, but ups-and-downs will be the story of the year and there will be profit-taking,” Gulay Girgin, chief economist at Istanbul-based Oyak Securities, said by telephone on Jan. 25. “Yields are already hovering at historical low levels, so I don’t know the bottom, but it’s very difficult to fall further.”
The yield on the benchmark two-year security rose four basis points to 5.88 percent on Jan. 25, bringing them 15 basis points above the closing record-low reached on Dec. 4. That’s down from 10.37 percent 12 months ago as yields fell below those for higher-rated Russia, India and Brazil.
Fitch Ratings upgraded Turkey in November, the country’s first investment-grade ranking in 18 years. Moody’s will probably raise Turkey within six months and bond yields may fall as much as 35 basis points on the move, Goldman Sachs Group Inc. said in an e-mailed report on Jan. 24.
An upgrade will “help the case for institutional investors, who require investment grade from two major rating agencies to be able to invest in a country,” Alper Ince, who helps oversee $8.5 billion as managing director at Pacific Alternative Asset Management Co. in Irvine, California, said by e-mail on Jan. 24. “The key question is how much of this is already discounted by valuations and flows by investors.”
Predicting the consequences of a rating change may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974. Yields were measured after a month relative to U.S. Treasury debt, the global benchmark.
Investors bought $411 million of bonds in the week ending Jan. 18, bringing this month’s total to $1.9 billion, the best start to a year since 2011, according to central bank data. Turkey attracted a record $16 billion from foreign inflows into bonds last year.
“Another investment-grade move is a big positive, although less for re-pricing than for new flow,” Stuart Hackett, director of trading at Ekspres Invest in Istanbul, said in e-mailed comments on Jan. 25. “Funds that didn’t touch Turkey previously would need to buy in.”
The increase in yields at the end of last week was “a healthy correction that should continue to some extent next week before we take off again,” Hackett said. “Credit Suisse and other bank cuts were the trigger.”
A Moody’s upgrade in the first half of this year has been “priced in to a great extent,” Ates Buldur, an analyst at Credit Suisse in Istanbul, wrote in the report on banks. The market has seen most of the positives at the macroeconomic and banking level, he said.
The extra yield investors demand to own Turkish debt rather than U.S. Treasuries has dropped 217 basis points since the beginning of 2012, or 2.17 percentage points, to 161 as of 2:50 p.m. in Istanbul today, according to JPMorgan Chase & Co.’s EMBI Global Index. That compares with the emerging-market average of 255 and with 143 for Brazil and 155 for Russia.
Moody’s rates Turkey at Ba1, its highest non-investment status. Brazil is ranked two levels above Turkey and Russia three steps higher. S&P rates Turkey two levels below investment grade.
Five-year credit-default swaps on Turkey were unchanged at 120, falling 169 basis points in the past 12 months. Declining prices show improving perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.
The lira was little changed at 1.7663 today. Bond yields fell two basis points to 5.86 percent.
The ISE National 100 Index (XU100) of stocks sank 2 percent on Jan. 25, with the gauge for banks sliding 3.4 percent, the most in 11 months. The broader index, which rallied 53 percent last year, had closed at record highs every day since Jan. 14. The index dropped another 1.6 percent today. Banks led with a 2.5 percent fall.
“If a second investment grade comes, the markets will rally a bit more, but probably a lot is already in the price,” Tim Ash, head of emerging-market research at Standard Bank Group Ltd. in London, said in e-mailed comments on Jan. 25. “Bonds in general look overbaked, while equities maybe just came too far, too fast.”
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