Not for the first time in recent years, investors are once again anticipating a turn-around Türkiye’s prospects as the policy pivot which began last year has gained traction.
- FX reserves have increased, growth is slowing down, KKM deposits have declined and the current account is showing signs of adjusting.
- Stated policy goals, and implementation thus far, are encouraging. But for these initial gains to be consolidated and cemented, investors will require continued evidence that inflation is on a sustained downward path.
- The trend depreciation of the lira in recent months suggests there is a trade off between reserve accumulation and nominal currency performance. This trend, in the near-term, will impede local currency inflows and presents a challenge to the disinflation process. However, for investors, as long as this depreciation is below what’s priced by forwards, as we think it will in coming months, TRY FX still provides reasonable total returns.
- We do not anticipate a big Türkiye ‘beta’ trade in the months ahead, and therefore are selective across the fixed income complex to express the view of policy adjustment against a backdrop of still-elevated risks.
- Sovereign Credit: We are MW sovereign credit. Turkish sovereign credit spreads have rallied well beyond their still-low ratings, and are back at spread levels that should facilitate ample issuance in a year with hefty maturities.
While reform resiliency would allow spreads to continue to grind tighter, valuations are at the recent tights and we expect foreigners to face significant supply.
- FX: We maintain a bullish view on TRY, with an OW in the GBI-EM Model Portfolio and an outright short in 21-May-2024 USDTRY FX forwards.
Positive real yields and cheap valuations argue for a real appreciation potential for the lira, but much will depend on the commitment to the disinflation process. Our expectation is for USDTRY to end 2024 at about 36 (revised up from 34), which should equate to about 15% total return versus the forwards curve.
- Local bonds: We bide our time on TURKGBs with a MW stance for now. Local bonds already look well priced for the projected improvement in fundamentals with inflation assumptions of 25% and below needed to justify bullish TURKGB views.
- Corporate Credit: OW ‘riskier’ credits at the expense of the ‘safest’ ones; also consider adding laggards. The safest credits held up well during the past few years when Turkey’s macro-economic condition was challenged, but given the likelihood of real currency appreciation, corporates with high FX-linked revenue and limited FX-linked operating costs could fare worse than corporates with predominantly TRY-linked revenue.
Excerpt from research note titled “Türkiye: High Hopes, Continuing Caution”
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