The first acute phase of the crisis with investment funds in Turkey ended with the liquidation of 131 funds holding assets of more than 890 billion lira. But investors, including those in other countries, still have to face its consequences. Explains Zaman Rizvanioglu Habibov, investment analyst at ATLAS Capital.
The fire has been put out, but the problem has not been solved.
Turkey’s authorities managed to contain the acute phase of the crisis, but not to eliminate all its consequences. That is the most accurate way to describe the current stage of the story involving investment funds in Turkey. The central bank rapidly expanded the provision of liquidity; the regulator halted operations with problematic funds; transferred their liquidation to İşbank and Ziraat Bank; and introduced temporary measures to reduce pressure on brokers. This made it possible to slow down the chain of “asset price declines—new redemptions—forced sales,” but a partial recovery of the market does not mean the problem has been fully resolved.
A total of 131 funds managed by seven asset managers, with combined assets of over 890 billion lira (more than $18 billion), have been sent into liquidation. It is important to understand that liquidation does not automatically mean that investors lose the entire amount. Fund assets must be sold gradually, and the proceeds will be distributed among unit holders in proportion to their stakes.
The main uncertainty is at what prices it will be possible to sell the illiquid securities and how far their actual value may differ from the previously published net asset value (NAV) of the funds.
Notably, on September 20 the Turkish regulator—the Capital Markets Board—extended the maximum liquidation period from three to six months. On the one hand, this is a sensible measure to avoid a rapid forced sell-off of assets at any price. On the other hand, the very extension suggests that portfolios cannot be turned into cash painlessly in a short time. Therefore, the crisis is not over yet: the final scale of losses will become clear only after the first investor payouts and the disclosure of the actual realization prices of the assets.
What to watch?
Investors now need to keep an eye on several groups of indicators.
— First, the schedule of payments and the difference between the last published NAV of the funds and the amount actually being returned to investors.
— Second, for outflows from funds not included in liquidation: if redemptions spread to the healthy part of the market, the local problem could turn into a broader crisis of confidence.
— Third, what matters is the dynamics of the lira, the yields on government bonds, the cost of insuring Turkish debt, bank liquidity, and the market’s need for additional financing from the central bank.
— Separately, it is important to monitor low free-float stocks that were held in the portfolios of several related funds, as well as any potential losses by brokers on margin positions and loans backed by such securities.
— Another milestone is the November review of the MSCI indices.
Even before the crisis, international investors were concerned about the lack of transparency in the ownership structure and possible coordinated transactions in certain Turkish stocks. If, by the November review of the MSCI indices, it does not see sufficient progress in improving market transparency, the index provider may begin consultations on the further methodology for accounting for Turkey and Turkish securities in its indices. The result could be changes in index weights or composition, including the potential exclusion of certain securities. This could trigger selling by index funds and increase the cost of capital for Turkish companies.
Will the Turkish crisis spill over into other countries?
In the baseline scenario, the likelihood of a large-scale international contagion remains limited. The crisis is concentrated mainly in local funds, in shares with low liquidity, and in transactions in Turkish lira. As long as it does not grow into a banking-system crisis or a sharp currency shock, the direct impact on other countries should be moderate.
The main external channel is not cross-held debts, but a deterioration in global investors’ risk sentiment toward emerging markets.
Outside Turkey, the direct effect is likely to be limited to the portfolios of international funds investing in Turkish assets.
If the stress spills beyond the investment-fund segment and leads to a weakening of the lira, higher funding costs, or deteriorating quality of bank assets, increased volatility could affect the shares of foreign bank groups that have a meaningful business presence in Turkey.
In particular, this involves Spain’s BBVA, which controls Garanti BBVA; Emirates NBD from the UAE, which owns DenizBank; and Qatar’s QNB Group, which controls QNB Türkiye. At the same time, the baseline scenario currently does not assume a significant impact on the banking systems or stock markets of Spain, the UAE, and Qatar as a whole.
Particular attention may be directed to markets with a high share of retail investors, low free float, and opaque cross-ownership. In particular, MSCI is examining transparency issues in Turkey and Indonesia at the same time, so the Turkish story could raise investors’ requirements for corporate governance quality in other emerging markets as well.
For Kazakhstan, the direct financial impact is likely to be minimal. Indirect effects are possible only through a general decline in appetite for risk in emerging markets, outflows from regional funds, or a sharp deterioration in the condition of Turkey’s banking system. At present, there is not enough evidence of such signs.
Thus, the acute phase was contained fairly quickly, but a final assessment can only be made after payout begins, the real value of the assets is verified, and after the November MSCI decision.ㅤ