For the Safest Gains in Emerging World Try Turkey, Colombia

  • Nations offer best risk-adjusted returns among major peers
  • Fed, oil rebound turn investors' attention from domestic risks

As the Federal Reserve’s dovish tone gives investors a chance to disregard domestic risks in emerging markets, equity traders betting on Turkey and Colombia are coming out on top.

The two stock markets, roiled by political turmoil in Turkey and economic troubles in Colombia last year, have produced the highest returns this year among the 20 biggest developing nations once price swings are stripped out, according to data compiled by Bloomberg for 2016. That means investors have had to take less risk to achieve gains of 17 percent in Istanbul and 16 percent in Bogota than, say, Sao Paulo, where the returns are similar but the volatility, and thereby the threat of losses, is almost twice as high.

Stocks in Turkey and Colombia are rallying as investors overlook the same concerns that drove them away last year. Turkey continues to be wracked by a slowing economy, coupled with frequent terror attacks and a migrant crisis. Colombia’s inflation is running at a more than 14-year high with the current-account deficit near record levels. The difference this time is a reaffirmation by Fed Chair Janet Yellen of the U.S. central bank’s accommodative policy, signaling capital flows into emerging markets will continue for now.

“The global picture is dominating domestic factors,” said Tony Hann, who helps oversee about $270 million as head of equities at Blackfriars Asset Management in London and holds both Colombian and Turkish stocks. “The key factors are now when or if we get a U.S. rate rise and the oil price. If the oil price falls to bottom of the range and Mrs. Yellen sounds a lot more hawkish than currently, I suspect Turkey and Colombia will not be the best performers.”


Equities in Istanbul added $30 billion in value in the first quarter, the biggest increase since June 2014. That compares with a $79 billion loss last year.

“This makes no sense from a fundamental perspective, particularly given Turkey is at the epicenter of the terror situation,” said Nathan Griffiths, a senior emerging-market equities manager who helps oversee $1.1 billion at NN Investment Partners in The Hague and has an underweight position in Turkish shares. “But locals are still sitting on a lot of dollars and so could continue to drive the market higher in the near term.”

While the emergence of a stable government after two elections in a single year eased the political risk that had unsettled markets, terror attacks that claimed more than 100 lives and an influx of refugees from Syria have weighed on the economy in recent months. Growth is projected to slow to 3.1 percent in 2016 from 4 percent last year, according to the median estimate of 30 economists surveyed by Bloomberg. The government has resumed its campaign for lower interest rates just as it appoints a new central bank governor, highlighting that political interference in monetary policy remains a risk.

“There are a lot of uncertainties regarding Turkey’s long-term prospects, mainly due to politics,” said Hertta Alava, the head of emerging markets at FIM Asset Management Ltd. in Helsinki. “I wouldn’t expect them to outperform” in the coming months, she said.


Economic troubles have come to the forefront in Colombia. Inflation has accelerated to the fastest pace since 2001 as the El Nino weather phenomenon hits food supplies and a weakening peso pushes up import costs. Consumer prices are soaring even after policy makers raised borrowing costs at their past seven meetings.

Morgan Stanley last month reduced its growth forecast for 2016 to 2.1 percent from 2.7 percent, saying the country’s measures to slow inflation and narrow the current-account gap will end up cutting growth. Standard & Poor’s, which rates Colombia’s foreign-currency debt two levels above junk, lowered the outlook to negative in February, saying the country is in need of fiscal reform.

Against this backdrop, shares in Bogota have completed the best quarter since 2010 and boosted their valuations by about 30 percent as oil, Colombia’s biggest export item, rebounded.

“It really was mostly an external change because Colombia’s fundamentals haven’t changed at all,” said Cesar Cuervo, the head of north Andean equity research at Credicorp Capital in Bogota. “Already the strong discount to historical values, and to its peers in the region, has narrowed a lot. There’s not that much more space for a re-rating.”

Shares in Istanbul declined 0.3 percent on Tuesday, falling from their highest level since June 2015. The benchmark gauge in Bogota extended gains to its highest in about 11 months.

“I would love to continue playing selectively on Turkish stocks. It’s always been an incredibly good bottom-up market, unlike Colombia,” said Tim Love, a London-based money manager at Gam UK Ltd., which oversees $130 billion in assets. “Colombia is a longer game. I wouldn’t chase it.”

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