Deutsche sees Turkey local sovereign bonds as 2024 emerging market top trade

Despite a sharp recent repricing offering much better entry levels into Turkish government bonds, it was still a bit too early to re-enter the market in general, though some shorter-dated issues were already becoming attractive, Deutsche Bank strategist Christian Wietoska said in a note to clients.

"For now, we maintain a wait-and-see approach and stay underweight," said Wietoska.

"However, we do expect Turkish fixed income to become one of the best-performing EM local markets next year – after another 200-350 bps sell-off," Wietoska said in the note dated Nov. 7 and sent to media on Monday.

Looking at emerging market bond markets outside Turkey, Wietoska predicted additional adjustments in Egypt early next year on the back of another potential FX devaluation.

Egypt has faced a raft of sovereign ratings downgrades and a bruising economic crisis after COVID-19 ravaged its key tourism sector.

A surge in energy prices and rising borrowing costs ramped up the pressure on its fragile finances, triggering a string of currency devaluations and record inflation.

"For now, we remain underweight and prefer exposure only to t-bills," said Wietoska.

Overall, Wietoska said Deutsche remained bullish on the asset class going into year-end.

Improved fundamentals, too-high pricing for neutral rates, and supportive technicals such as low supply of bonds and light positioning are offsetting fiscal challenges and sensitivity to external factors, he said.