Europe's condition for hot money: Inflation

Europe's largest asset management fund, Amundi, believes that foreign investors will stay away from Turkish lira-denominated bonds until inflation reverses course and slows down; this means that capital inflows will not occur before the middle of the year.

In an interview with Bloomberg, Sergey Strigo, Co-Head of Emerging Markets Fixed Income at Amundi SA, said, "In my opinion, for international investors to enter the local bond market, we ideally need to see that inflation is truly falling. And we haven't seen that yet. That would be the main trigger for me."

MORE OPTIMISTIC THAN PRICED IN

Strigo, who is more optimistic about the future of the Turkish lira than what is priced into the market, noted that Amundi has already invested a portion of the 2 trillion dollars under its management in eurobonds issued by Turkish companies and the state.

Strigo stated that "Although the currency will continue to weaken gradually in nominal terms, one-year forward contracts imply 'excessive depreciation'," adding that Amundi has a "neutral position" on the lira. While one-year dollar/TL forwards point to a level of approximately 43, spot transactions are taking place around the 30 level.

POSITIVE IN 2024

Strigo said that a significant portion of the currency's appeal comes from the "carry trade."

He also added, "In absolute terms, the Turkish lira has the potential to provide positive returns for 2024 at current levels."

THE INTEREST RATE TO BE ANNOUNCED BY THE CENTRAL BANK IS IMPORTANT

Pointing to expectations that the Central Bank will raise the interest rate from 42.5 percent to 45 percent this week and the possibility that even more could be done, Strigo said, "Especially if policy continuity is maintained, this could increase interest in lira-denominated bonds."

Strigo added, "There is definitely potential for portfolio inflows once we start to see inflation figures improve a bit from where they are today."