Delays to key reforms in Turkey may merely dent rather than destroy investors' enthusiasm for an economy whose higher growth and lower inflation prospects have taken it to the top of fund managers' shopping lists.
Turkish shares, among the best-performing emerging equities this year, fell to a three-week low and bond yields rose after the country's industry minister said fiscal reforms - aimed at cutting budget deficits and debt - would not be implemented next year as expected.
The news comes at a time when global risk appetite is looking shaky again and positioning in Turkey is pretty crowded. Yet this delay by itself, even though it gives the government leeway to spend ahead of a July 2011 election, may not in the long term lessen Turkey's desirability for investors.
Turkey is fund managers' top equity play with a net 60 percent overweight, Merrill Lynch/BoA's monthly survey revealed in July. Turkish stocks have hit record highs in recent weeks, led by banks which are benefiting from a strong rise in consumer lending as well as low interest rates.
With foreign investors holding an estimated 70 percent of Turkey's stock market, the ingredients for a reversal are there. Ratings agencies expressed concern, fuelling worry that they may hold off on Turkey's long-awaited upgrade to investment grade, a status that tends to bring in a bigger pool of international investors.
Turkey is rated Ba2 by Moody's and BB by S&P, two notches below investment grade, and BB+ by Fitch.
Yet Calvert says valuations remain compelling, meaning foreigners are unlikely to bail out en masse just yet.
MSCI's Turkey index trades at around 9 times 12-month forward earnings, compared with 11 times for the MSCI global emerging equities index.
Even a breakdown in talks with the International Monetary Fund earlier this year failed to deter foreign fund managers, although this could quickly change.
"One of the reasons why Turkey has been performing so strongly recently is that markets bought the idea Turkey was prepared to implement strong fiscal policy independent of the IMF," said Manik Narain, emerging markets strategist at UBS.
Narain said he remained long of the Turkish lira, however.
Turkey's status as an investor favourite is relatively new. It had a history of fiscal mismanagement until the AK Party government, backed by the IMF, led the economy back from the ruins of a financial crisis after it came to power in 2002.
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