The Kapali Carsi

Ar’Che’typical approach to capital flows (to Turkey)

In one of the hit songs of the musical Evita, Che sings that “when the money keeps flowing, you don’t ask how.” But that’s exactly what I am planning to do.

Here’s the intro. to my latest Hurriyet Daily News (HDN) column, where I discuss why Turkey is attracting so much money. After describing the well-known hot money, I go on to discuss “lukewarm money” from Japan, which is much less-discussed. Anyway, you can read the whole thing at the HDN website, and I have some additional points once you are through the column:

First of all, I should note that I have been planning a column on Japanese retail investors to Turkey ever since I realized their growing interest in the lira at the end of June. As I noted in my Economonitor post at the time, I was hardly the first to notice that: Japanese investment bank Nomura had written about the phenomenon as early as February. But many jumped in the bandwagon after me, including FT Alphaville and Bloomberg credit, which is by far the best piece I saw on the subject- what a shame it is not public access:(…

I finally got around to writing my own piece, but the column “somehow” shaped up to be about capital flows to Turkey rather than flows from Japan per se. But that doesn’t prevent me from summarizing all the info. I gathered from my readings and chats with experts. First of all, several people told me that Japanese investors care about yields and growth the most (who doesn’t right?), so if we are going to compare Brazil and Turkey, we should look at those:

Bloomberg has a government bonds page dedicated to Brazil, which is BTW the only emerging market there. I saw that two-year Brazilian yields are very close to the Turkish benchmark. However, if we are making predictions about the future, we should project the path of interest rates as well. Morgan Stanley’s Brazil economist is forecasting another 25bp of easing after last week’s cut, and then no hikes until the end of next year, while the market is pricing in more than 1 percent of hikes in 2013. On the other hand, as I noted in the column, the Central Bank of Turkey is seeing capital flows as an opportunity to ease, and that idea has certainly been ascertained in the Bank’s regular meeting with economists yesterday. So from a rates point of view, Brazil is more advantageous.

Coming to growth, while I noted in my latest post that the Turkish economy has really lost pace of late, Brazil is not doing much better, either. I have to admit I don’t know Brazilian growth dynamics well, but I’d have to call a tie at this point.

But the more important point is the one I made in the column: Japanese retail investors are not traders, as several of my sources emphasized. It is true that they ditched Brazil for Turkey, but remember that the Brazilian Central Bank’s easing has added up to 5.25 percent, during which time the CBT actually raised rates for a period, and the real was weakening while the lira was more or less constant against the dollar (and the yen). In the Nomura Uridashi note I had hyperlinked in the column as well, New Zealand was given as example of how lower yields drove Watanabes away, but that was over the course of several years. In sum, I don’t think the difference between Turkey and Brazil will be so great to have Japanese investors rush back to the real.

Speaking of Watanabe & co, Uridashis are not their only sources for investment. There are also Toshins, i.e. publicly traded investment trusts, which have shifted into emerging markets of late, and Turkey is again a big winner and Brazil a loser, as another recent Nomura piece (I have realized these guys are, unsurprisingly, the best source for tracking Japanese flows) notes. The Barclays note I had hyperlinked in the column summarizes the various channels of investment.

Switching from this lukewarm to more well-known hot money, the two countries in investors’ radars are Turkey and Poland- that’s why the Wall Street Journal article I had hyperlinked in the column was very upbeat about the two countries. However, as a finance professional noted, Poland is currently going through a deleveraging phase, and the growth outlook is actually rather gloomy, as two recent Financial Times pieces have noted.

So what to make all this: Turkey is still a good place for hot money, and even a better place for lukewarm Japanese money, even when the imminent lower rates and growth slowdown are taken into consideration…

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