Emerging Markets Debt Turkey: The Investment Case

Transcription

1 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 Emerging Markets Debt Turkey: The Investment Case Summary Turkey has underperformed peers on the back of a rating downgrade as well as political turbulence. We believe valuations have cheapened in external and local bond yields more than warranted by the change in fundamentals, making Turkish assets more attractive. Although volatility may remain elevated in the short term, Turkish assets could perform reasonably well in the mid-term helped by cheap valuations, high carry and clean positioning. Our view and outlook March 2017 The fundamental picture in Turkey remains a concern for investors. The country lost investment grade status, suffers from political problems and terrorist attacks, has a large current account deficit, high inflation and a large short term debt service. We think that the market has overreacted to some of these risks which resulted in forced selling and exacerbated negative pressure on asset prices. As valuations became more attractive relative to the change in fundamentals (Figure 1), we took the opportunity to initiate long exposures across hard currency and local debt assets in our EMD portfolios. We believe we are being compensated for the risks in the country and that investors did not price in some positive developments in the country such as improvement of the basic balance (Figure 2). Figure 1: Change in Turkey fundamentals in 2016 Figure 2: Basic Balance of Turkey GDP (% real change pa) 1.5 Consumer prices (% Reserves /GDP change pa; av) 1 Domestic demand (% Debt Service /GDP of GDP) 0.5 Inward foreign direct Budget balance (% of 0 investment /GDP GDP) -0.5 Public debt (% of Import cover (months) -1 GDP) Trade balance /GDP Primary balance (% of GDP) Current account Total External balance /GDP debt/gdp Total external Short Term External debt/reserves debt /GDP Short Term Debt /Reserves Turkey2015 dec 0 (10,000) (20,000) (30,000) (40,000) (50,000) (60,000) (70,000) Basic Balance of Turkey ($mm) Turkey2016 dec Source: EIU HSBC Global Asset Management as of December 31, 2016 Source: Bloomberg as of December 31, 2016 While there has been continued negative pressure since we put these positions on in our portfolios, we maintain our conviction as our analysis continues to indicate that we are compensated for the risks in the country as detailed below. document. This publication is intended for Professional Clients only and should not be distributed to or relied upon by Retail Clients. The information contained in this publication is not intended as investment advice or recommendation. Non contractual document.

2 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Spreads (bps) Turkey hard currency We find value in Turkey hard currency debt as we believe Turkey has the capacity to pay back their external debt outstanding as well as the ability to access capital markets to roll over maturities, even at higher US interest rates. High external financing is often pointed to as a risk for Turkey in an environment of higher US rates or Turkish lira (TRY) depreciation. However, we do not believe that external financing will be a threat because much of the short term external debt profile is in the private sector via banks which have hedged their FX liability. A majority of the outstanding debt has a 100% rollover ratio, limiting the concern over short term external debt. Turkey s economy is very much driven by the private sector and we believe private lenders will be able to distinguish between the more viable Turkish companies and those that are less robust. Additionally, while non-performing loans (NPL) are increasing, they are still very manageable. In our view, not every company will be supported by a state owned bank, preventing potential weakening of the Turkish banking sector over time. Figure 3: Turkey Relative Valuations 550 Turkey Spreads since Jan Turkey Spreads BB Spreads BBB Spreads South Africa Spreads Source: JP Morgan as of February 28, 2017 Valuations are attractive as spread levels spiked over 120 basis points from early July (before the failed coup attempt) through mid-january. We think relative valuations are also compelling as Turkey trades at wider valuation levels than other BB-rated countries due in part to the fact that many investors have been exiting the position. When looking at a comparable credit such as South Africa, it currently trades over 100 basis points tighter versus Turkey. We believe we are better compensated holding Turkey hard currency debt in our portfolios. South Africa is a country with a large current account deficit similar to the level of Turkey with political risks surrounding the succession of President Zuma and there is potential downgrade risk below investment-grade. South Africa is more crowded from a technical position as many investors moved out of Turkey into South Africa causing its spreads to tighten. Turkey local currency The Turkish lira (TRY) continues to offer an attractive investment opportunity given the high level of carry (yield currently over 11%) as well as a clean technical position as real money managers maintain an underweight position to the currency. document. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. 2 Non contractual document

3 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Carry Turkey local currency (cont d) In our view, valuations are compelling given the sharp sell-off in the currency in the second half of 2016 resulting in the currency trading over 20% cheaper to its 5-year real effective exchange rate (REER) average. Given the cheap valuations, the attractive yield and clean technicals (Figure 5), we maintain a long position to the TRY in our EMD portfolios. The Turkish lira suffers from central bank credibility. Low real rates and political concerns surrounding President Erdogan s consolidation of power and constitutional referendum in April have made the market worry that the Central Bank will not act in the face of higher inflation and FX volatility. While the Central Bank continues to be reluctant to hike rates, we believe they will continue to support the currency as they have proven recently by tightening the funding rate by 200 bps. We believe the government will take supportive measures to boost the economy in light of the Turkish referendum in April. We have seen the currency rebound in the last month given a retracement in Trump trades, a weaker dollar globally as well as a flatter yield curve following the dynamic central bank policy response. Therefore, we have reduced some of the exposure to TRY but maintain a long/overweight exposure. maintain a long/overweight exposure. Figure 4: Turkish lira valuation Figure 5: Carry vs 5-yr REER adjustment 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 Turkish lira Source: JP Morgan as of February 24, % 10% 8% 6% 4% TRY BRL RUB ZAR COP MXN IDR INR PEN 2% CLP MYR PHP 0% PLN THB RON SGDKRW HUF ILS TWD -2% -80.0% -60.0% -40.0% -20.0% 0.0% 5y Nominal FX Adjustment Source: HSBC Global Asset Management, IMF, Bloomberg as of February 9, 2017 CNY Positioning to Turkey (as of 28 Feb 2017) Total Return Hard currency duration: 0.32 years Spread duration: 0.32 years Market value hard currency: 8.15% Local rates: 0.20 years Local currency: 3.77% Hard Currency Hard currency duration: 0.71 years (vs benchmark 0.44 years) Spread duration: 0.72 years (vs benchmark 0.45 years) Market value: 9.86% (vs benchmark 6.30%) Local Debt Local rates: 0.23 years (vs benchmark 0.15 years) Local currency: 7.90% (vs benchmark 6.36%) document. Allocation is as at the date indicated, may not represent current or future allocation and is subject to change without prior notice. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. 3 Non contractual document

4 Important information? Contact Client Management Tel: +33 (0) Firm Disclosure This publication is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID. It is incomplete without the oral briefing provided by the representatives of HSBC Global Asset Management (France). The information contained herein is subject to change without notice. All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management (France).Consequently, HSBC Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. All data from HSBC Global Asset Management unless otherwise specified. Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. The value of investments and any income from them can go down as well as up. Capital is not guaranteed. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Investors are reminded that investments in High Yield issues represent a higher risk of default compared to Investment Grade issues. Investments in Credit Default Swaps (CDS) are less liquid than standard bond issues. Fluctuations in the rate of exchange of currencies may have a significant impact on performance. Investment in Financial Derivative Instruments (FDI) may result in losses in excess of the amount invested. This is because a small movement in the price of the underlying financial instrument may result in a substantial movement in the price of the FDI. The strategies can invest in sub investment grade bonds, which may produce a higher level of income than investment grade bonds, but carry increased risk of default on repayment. The value of the underlying assets are strongly affected by interest rate fluctuations and by changes in the credit ratings of the underlying issuer of the assets. Important information for Luxembourg investors: HSBC entities in Luxembourg are regulated and authorised by the Commission de Surveillance du Secteur Financier (CSSF). HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above document has been produced by HSBC Global Asset Management (France) and has been approved for distribution/issue by the following entities : HSBC Global Asset Management (France) RCS Nanterre. Portfolio management company authorised by the French regulatory authority AMF (no. GP99026) with capital of euros. Offices: HSBC Global Asset Management (France) - Immeuble Coeur Défense - 110, esplanade du Général Charles de Gaulle Courbevoie - La Défense 4 France. (Website: HSBC Global Asset Management (Switzerland) Limited Gartenstrasse 26, P.O. Box, CH-8002 Zurich, Switzerland (Website: Copyright HSBC Global Asset Management (France). All rights reserved. Non contractual document updated in March AMFR_Ext_145_ Non contractual document

5 Important Information for Swiss Investors: This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or saleof any financial instrument. This document may be distributed in Switzerland only to qualified investors according to Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA). The presented fund is authorised for distribution in Switzerland in the meaning of Art. 120 of the Federal Collective Investment Schemes Act. (Potential) investors are kindly asked to consult the latest issued Key Investor Information Document (KIID), prospectus, articles of incorporation and the (semi-)annual report of the fund which may be obtained free of charge at the head office of the representative: HSBC Global Asset Management (Switzerland) Ltd., Gartenstrasse 26, P.O. Box, CH-8002 Zurich. Paying agent: HSBC Private Bank (Suisse) S.A., Quai des Bergues 9-17, P. O. Box 2888, CH-1211 Geneva 1. Investors and potential investors should read and note the risk warnings in the prospectus and relevant KIID. Before subscription, investors should refer to the prospectus for general risk factors and to the KIID for specific risk factors associated with this fund. Issue and redemption expenses are not taken into consideration in the calculation of performance data. The fund presented in this document is a sub-fund of HSBC Global Investment Funds, an investment company constituted as a société à capital variable domiciled in Luxemburg. The shares in HSBC Global Investment Funds have not been and will not be registered under the US Securities Act of 1933 and will not be sold or offered in the United States of America, its territories or possessions and all areas subject to its jurisdiction, or to United States Persons.