Turkey: After “Central Bank Surprises”, underperformance likely to continue - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 23, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at BBH, suggests that despite the November elections, we believe that the political situation in Turkey remains very unsettled and the underlying economic fundamentals remain weak, and so we believe that underperformance in Turkish assets is likely to continue in 2016.

    Key Quotes

    Political Outlook

    Erdogan and his AKP won an unexpected victory in November elections. The end of lingering political uncertainty since the inconclusive June elections has been welcomed by markets, but we think a continuation of the increasingly autocratic rule of Erdogan is not necessarily a positive development. The next elections are not due until 2019.

    Terrorist activity stemming from ISIS and the civil war in neighboring Syria will severely test Erdogan’s foreign policy. Furthermore, the domestic situation with the Kurdish PKK remains unsettled.

    Relations with Russia remain tense, with Putin enacting economic sanctions after the downing of the Russian jet last month. Among other things, Russia has restricted imports of Turkish goods and suspended visa-free travel. Russia is Turkey’s second largest trading partner, behind only Germany. Russia is the number one source of Turkish imports, but is only the seventh largest destination for Turkish exports.

    Economic Outlook

    The economy is picking up. Growth is forecast at around 3% in both 2015 and 2016. GDP grew 4% y/y in Q3, the fastest since Q1 2014 and suggests potential for upward revisions to those forecasts. On the other hand, the ERBD recently warned that persistent sanctions by Russia may reduce GDP growth by 0.3-0.7 percentage points in 2016, with much of the impact coming from tourism. Deputy Prime Minister Simsek estimated the economic impact of sanctions at around 0.4 percentage points. Price pressures remain high, with headline CPI inflation rising 8.1% y/y in November.

    Governor Basci has hinted that Turkish rates would follow US rates higher, but that did not happen. He also suggested that simplification of the bank’s rates corridor would be seen after the Fed meeting. That too did not happen. The next policy meeting is January 19. Given the negative market reaction to the surprise move, we would expect some efforts at further clarity ahead of that meeting.

    Investment Outlook

    The lira is one of the worst performing EM currencies this year. TRY is down -21% YTD vs. USD, and trails only ZAR (-24%), COP (-28%), BRL (-34%), and ARS (-35%). Our EM FX model shows the lira as having VERY WEAK fundamentals. As such, we expect lira underperformance to continue in 2016. In the coming weeks, we expect USD/TRY to test and move beyond the all-time high near 3.0750 from September.

    Turkish equities have outperformed within EM. MSCI Turkey is down -13% YTD, and compares to -17% YTD for MSCI EM. This outperformance is likely to ebb as the central bank eventually embarks on a long-overdue tightening cycle. Indeed, our EM Equity model has Turkey at a NEUTRAL position.”
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