Japan's Love for Turkish Uridashi Ends 3-Year Brazil Affair

Updated on
  • Sales of Brazilian Uridashi on pace for eight-year low
  • Japanese retail investors increasingly favoring Turkey

Japanese traders just aren’t that into Brazil anymore.

Sales of real-denominated bonds to mom-and-pop investors in Japan are on pace to drop to an eight-year low, with just $380 million issued so far this year compared with $2.9 billion in 2016. Meanwhile, sales of so-called Uridashi notes denominated in Turkey’s lira have already soared past last year’s total, amounting to $517 million so far in 2017.

The shift by Japanese retail investors -- the main buyers of Uridashi -- is emblematic of changes in global sentiment toward the two countries, which have both been wracked by political scandal. While Brazil’s turmoil appears to be heating up, with the president facing calls for his resignation, Turkey seems to be stabilizing after an April election handed President Recep Tayyip Erdogan sweeping powers, with last July’s coup attempt and escalating tension with Russia fading from the headlines.

"When it comes to Turkey, any dip seems to be an investment opportunity for Japanese retail investors, even if that means dealing with political risks," said Shinji Kunibe, the Tokyo-based head of fixed-income at Daiwa SB Investments Ltd., which oversaw about $51 billion of assets at the end of March.

With domestic bond yields below zero, Japanese households often buy notes denominated in emerging-market currencies such as the real and lira -- which yield more than 10 percent -- to boost returns. That demand allows companies from developing nations to issue Uridashis in Japan at rates they wouldn’t be able to get in other overseas bonds.

Lira-denominated debt is looking more attractive after the currency strengthened more than 3 percent this quarter following four consecutive years of declines against the U.S. dollar. The lira strengthened 0.3 percent against the dollar Monday. So far, Turkey’s central bank has resisted calls by Erdogan to lower borrowing costs, keeping payouts on Turkish debt elevated.

Brazil, on the other hand, has cut interest rates six times in the past year as the nation looks to claw its way out of its deepest recession in a century. The real is the world’s worst performing major currency this year, having slipped 1.9 percent against the dollar.

Although the nations face cloudy political outlooks, Brazil’s turmoil is getting worse, while Turkey’s has eased since April’s referendum, according to Lucy Qiu, an analyst at UBS Wealth Management’s Chief Investment Office, which oversees strategy for $2.2 trillion in assets. Both offer attractive yields, so traders will favor the currency with lower volatility, she said.

Moody’s Investors Service lowered its outlook on Brazil to negative last month, saying the corruption scandal ensnaring President Michel Temer poses an increased threat to the recovery of Latin America’s largest economy. The 76-year-old leader scored a breakthrough on Friday when the nation’s top electoral court acquitted him of illegal campaign financing charges.

Those political dynamics, coupled with less attractive valuations since Brazil’s real led global gains last year, have turned Japanese investors sour on the nation following three years in which Brazilian companies were the most popular Uridashi issuers, according to Toru Suehiro, a senior market economist at Mizuho Securities Co. in Tokyo.

“They’ve already built up their exposure in the real-denominated notes and the currency’s rebound has paused,” Suehiro said. “Those who really want to get high yields have to go to emerging markets despite risks involved in them. So they want to enter when they believe it’s hitting the bottom.”

— With assistance by Ye Xie

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