Pictet Cuts Overweight on Turkey Corporates After Buying CDS

(Bloomberg) — Pictet Asset Management SA, a leading European-based asset manager, is cutting its overweight stance on Turkish corporate bonds given the country’s recent political unrest.

“We’ve kind of reduced exposures and probably are a bit more cautious,” said Sabrina Jacobs, a senior client portfolio manager at Pictet, which had $288 billion of assets under management as of last year. The fund manager has been reducing currency and local-bond positions and buying credit-default swaps, a widely-used credit risk-hedging tool, she said.

Many global investors including Pictet had picked Turkey as a favorite bond trade of 2024 in emerging markets. Jacobs went overweight the country late last year.

“It’s all great and then something happens on the political side and it’s just kind of throwing it all out of the window,” she said in an interview in Pictet’s London office on Wednesday.

Foreign investor sentiment on Turkey quickly turned sour last week after local authorities escalated a crackdown on the opposition with the detention of President Recep Tayyip Erdogan’s most formidable political opponent, Istanbul Mayor Ekrem Imamoglu, on corruption charges. The nation’s currency and stock market have seen mounting selloff pressure amid an exodus of foreign capital. 

Corporate bonds from Turkey have handed investors a 1.3% loss this month, making them worst performers alongside Indonesia’s companies, according to a Bloomberg index. That follows an almost 9% return on the asset class last year, when it outperformed the emerging-market average.

While Turkey’s central bank has worked to cushion the market impact, investors are still concerned. Turkey’s five-year sovereign CDS widened by about 70 basis points last week to a one-year high and are still hovering around that level, according to data compiled by Bloomberg. 

Turkey’s lira briefly plummeted as much as 11% on the day of Imamoglu’s detention, but has since been hovering at around 38 per dollar, about 3.5% weaker than it was on the day before the news broke. Turkey’s benchmark stocks index is down more than 10% over the same period, the biggest loss worldwide.

Jacobs bought a basket of emerging-market CDS that included Turkey a few days before the crisis to hedge the portfolio and because she thought the derivative was trading at very low levels. That turned out to be a “very, very lucky” decision, she said. Going forward, she said she’d be closely monitoring whether the government could keep the currency on a modest depreciation path. 

“Structurally, there are people that are now cautious and not returning and that’s a problem for the flow story. That’s a problem for the currency,” she said. 

In other emerging markets, Pictet is also managing its credit portfolios with extra caution in the face of growing US tariff concerns. Jacobs is more bearish on exporters and has trimmed exposure since the US election in areas that may be more vulnerable, such as Mexico and cyclical industries. 

Instead, the firm is adding more defensive consumer exposure in oil and gas industries as well as utilities such as telecommunication companies, she said.

–With assistance from Selcuk Gokoluk.

(Updates with bond performance in sixth paragraph. A previous version corrected the currency of assets under management in the second paragraph.)

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