The Turkish lira is down by 40% for the year to date against the US dollar, and inflation is a whopping 16%. Moody’s concern about the local banking sector has resulted in downgrades at 20 financial institutions, but what does the crisis mean for Turkish wealth management? Mishelle Thurai reports.
The Turkish economic crisis refuses to go away. The new lira fell by more than a quarter in August, its biggest monthly fall since its launch in 2005. Inflation is hovering around 16%.
Turkish President Erdogan remains under attack for delaying a rise in interest rates. Add in Erdogan’s long-running spat with President Trump and it is easy to understand international jitters about the Turkish crisis.
The wealth sector, among many others, is no exception in being under pressure. Zara Kazaryan, portfolio manager, emerging market debt at Columbia Threadneedle, tells PBI: “In the near term, the sharp depreciation in the Turkish lira, the worsening relationship with the US and the imposed sanctions increase the risks of the short-term debt rollover by Turkey, and puts significant pressure on the Turkish financial system.”
A spokesperson from Globalaw adds: “Currently the wealth management sector is experiencing difficulties due to the rise in foreign exchange. Frankly, this was expected: the Turkish economy has been in depression for the last three years, and many wealthy Turkish people transferred their cash deposits and investments outside of Turkey.
“The current crisis in Turkey has negatively affected the wealth management sector. Most wealthy people have transferred their assets to more stable countries. Real estate has, unfortunately, lost some of its value.”
Before the crisis: potential for Turkey’s asset management sector
Key findings from GlobalData’s 2016 Wealth in Turkey: HNW Investors report state that wealth accumulation through earned income or as a first-generation entrepreneur are common among Turkish individuals. They together account for 64% of the HNW population in Turkey.
The report also states the majority of Turkish HNWIs accumulated wealth through manufacturing and property, although finance and construction also played roles.
AuM for Turkey-focused equity funds in the wealth management sector has taken a hit in recent years, falling from $3bn in 2012 to $1.7bn in 2016. GlobalData, says this is a result of political tensions and concerns over growth, which have deterred large investors. Equity will, therefore, retain only a small proportion of Turkish HNW portfolios.
Projections for growth in the wealth management sector in Turkey are embedded in factors such as HNW short-term expatriates. The majority of Turkish HNW expatriate clients have been residing in Turkey for three years, and as the GlobalData reports suggests, wealth managers should recognise the growing population of short-term HNW investors who require a range of services.
Crisis hits Turkish wealth management
There are, at present, numerous challenges pressing Turkey’s economy and the wealth management sector. Mark Dowding, head of developed markets at BlueBay asset management, says: “With Turkey running a current account deficit of 4% of GDP, it has needed to attract capital from overseas, but foreign flows have recently been running in the opposite direction. The growing spat between Trump and Erdogan is only exacerbating this.
“This trend is compounded by a reluctance to raise Turkish interest rates, even as inflation rises and the currency falls, with volatility increasing and risks escalating.”
Sanjiv Shah, chief investment officer at Sun Global Investments, says: “Even though the country makes up a small percentage of the overall global economy and markets, its deepening crisis remains a cause for concern as this can have a domino effect on the other markets – particularly in Spain and Italy.”
The future of wealth management: is it all doom and gloom?
Investors may be tempted to pull out of risky investments in bonds and currency, but the opposite action is needed to strengthen the market and the wealth management sector as a whole.
If there is a decline in investments made on riskier trade, then this can make stocks go up as a whole. The implication for wealth managers is that this will make it harder to invest for clients, and therefore harder to gain returns, which will impact overall portfolios.
Shah says: “HNWIs may well be focused in traditional safe-haven asset classes, including precious metals and real estate. There has been significant interest in ‘investment immigration’, where HNWIs look to investing property and real estate abroad.”
Shah continues: “As laws and policies continue to shape this sector, wealth and asset management in Turkey is growing, as investors and clients are seeking more trustworthy companies that offer quick solutions.”
Although Turkey is in a currency crisis, it remains a relatively minor contributor to the global economy, and its impact on other key world markets will be limited. Much will depend on the government’s monetary policy decision, scheduled for 13 September. A decision to raise interest rates sharply would do much to boost the lira and ease international concerns.