Lira and Turkey underperforming - BBH

Analysts at Brown Brothers Harriman explained that the lira has generally underperformed. 

Key Quotes:

"In 2015, TRY lost -20% vs. USD.  This was behind only the worst performers ARS (-35%), BRL (-33%), ZAR (-25%), COP (-25%), and RUB (-20%).  So far this year, TRY is -4% YTD and is ahead of only the worst performers ARS (-15%) and MXN (-10.5%).  Our EM FX model shows the lira to have WEAK fundamentals, so this year’s underperformance is to be expected.  For USD/TRY, the break above 3.0275 today sets up a test of the all-time post-coup high near 3.10 from July 20.  

Turkish equities have underperformed this year after a decent 2015.  Last year, MSCI Turkey was -12% while MSCI EM was -17%.  So far in 2016, MSCI Turkey is +4% YTD and compares to +14.5% YTD for MSCI EM.  This underperformance should continue, as our EM Equity model has Turkey at an UNDERWEIGHT position.

Turkish bonds have outperformed this year.  The yield on 10-year local currency government bonds is about -102 bp YTD.  This is behind only the best performers Brazil (-506 bp), Indonesia (-176 bp), Peru (-154 bp), Colombia (-150 bp), Russia (-146 bp), and South Africa (-110 bp).  Clearly, much of the EM bond rally has been driven by the global quest for yield.  With inflation likely to continue falling and the central bank likely to continue easing, we think Turkish bonds can continue outperforming but will be subject to rising downgrade risks.

Our own sovereign ratings model rates Turkey at BB/Ba2/BB.  S&P quickly cut Turkey to BB with a negative outlook right after the July coup attempt.  We have long felt that both Moody’s and Fitch were premature in upgrading Turkey to investment grade.  In September, Moody’s cut Turkey’s rating by a notch to Ba1 with a stable outlook.  In August, Fitch cut the outlook on its BBB- rating from stable to negative and we expect it to also move Turkey to sub-investment grade soon. "