Photographer: Kerem Uzel/Bloomberg

Turkish Politics Leaves Fund Managers Underweight Lira, Bonds

Fund managers prefer to keep underweight positions on Turkish assets as the new government’s main focus remains on the constitutional reforms rather than on the economy.

Deputy Prime Minister Mehmet Simsek kept his job in a cabinet reshuffle this week, though portfolio managers see him as “alone” in Turkey’s new government. And while Simsek’s reappointment drove the lira to a two-week high against the U.S. dollar on Wednesday, fund managers say the currency’s rally is likely to be short-lived.

Aberdeen Asset Management

“If the rally in Turkish lira continues, we would look to add to short positions rather than anything else,” Aberdeen Asset Management portfolio manager Viktor Szabo says in an interview.

Investors are pleased with Simsek’s reappointment as they assume that as long as he’s there, there won’t be any major deterioration in country’s fiscal balances, Szabo adds. However, Simsek is “basically alone” in the new government and he probably won’t have an “easy job,” he says.

While changing the constitution is currently the main point on the new government’s agenda, as soon as that’s done the focus will move to the economy. Pressure on the central bank to cut rates more aggressively may increase under the new administration, paving the way for lira weakness, Szabo says.


Ashmore keeps a negative view on the lira and would be inclined to lighten up any positions into the rally rather than chase it, head of research Jan Dehn writes in e-mailed comments.

The reappointment of Simsek, who is seen as “the anchor for policy credibility,” is positive news, as some investors had expected him to leave, Dehn says. That said, it’s naive to expect Turkey to make major changes in the direction of overall macroeconomic policy and politics, he adds.

Standard Life Investments

Standard Life Investments will remain underweight on Turkey as the new government is unlikely to step up reform to address longer-term challenges, according to Kieran Curtis, investment director of the emerging-market debt team.

“The latest political developments are positive in the short term, and the reappointment of Simsek as deputy prime minister is a sign of continuity for investors,” Curtis says in an interview. “However, the long-term view remains negative as the economy faces structural issues,” he adds.

The new government is unlikely to focus on economic reforms that foreign investors expect to see because “they are focused on changing the constitution,” Curtis says.


GAM remains underweight on the lira, according to investment director Paul McNamara. Turkey is on the right path, though it’s probably the most vulnerable among major emerging markets, McNamara says in e-mailed comments.

While Turkey’s got excessive credit growth under control and has successfully navigated a couple of major political issues, there’s no major market which so urgently needs a steady flow of external credit, he says.

The pressure point is the banking system, as banks have borrowed $100 billion from abroad since the 2008 crisis and need to roll the annually-maturing share over in the syndicated loan market, McNamara adds.

Insight Investments

Insight Investments stays flat on the lira, according to Colm McDonagh, head of emerging-market fixed income. The market had positioned for U.S. dollar gains against the lira in the short term due to political developments and a general weaker tone in emerging-market currencies, but Simsek’s reappointment seemed to be more positive than the market had expected, McDonagh adds.

Turkish lira gains are probably based on an unwind of short-term bearishness in the currency. In the medium-term, the risk is that government and central bank policy will incorporate tolerance of a weaker lira, he says.

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