With inflation above forecast and rising further, we think that the CBT will hike one more time, but is likely to wait for more data before acting. On the strategy side, we see a lira overshoot to 6.80 and prefer the long end of the USD curve, while we remain tactically positive on Turkish equities.
Economics | CBT to maintain its hawkish stance
With inflation above the CBT’s forecast and economic growth still going strong, we argue that the CBT is likely to keep its key policy rate unchanged at the upcoming non-core meeting on February 18 while maintaining its hawkish forward guidance on the back of inflation risks still being skewed to the upside. We maintain our view that the CBT is likely to deliver 100bp of tightening in the near term. Yet, there is uncertainty on the timing of the hike as it will most likely depend on market expectations, which can prompt the CBT to deliver in March or allow it to wait for the new forecast in April.
Risks to our call remain skewed towards rates on hold, with real ex-post interest rates in peer economies having declined into negative territory.
Macro strategy | Rates > credit > FX
The key question for Turkish fixed income assets is whether the strong gains following the CBT’s orthodox policy stance in recent months can be sustained or not. Considering that our economist expects the CBT to remain hawkish in the near term, we think that those gains are indeed
likely to be sustained. However, given the extent of the rally, we think that the risk/reward has started to deteriorate, especially on the FX side, where USD/TRY is testing our target of 7.0. On the rates side, we think that the February meeting is less relevant but market-implied pricing for the March meeting is likely to go up. We would use that opportunity to seek an entry point into 2y receiver positions.
On the credit side, further upside is possible but we need to see an improvement in external finances rather than a pause in moderation. Nonetheless, we prefer the long end of the USD bond curve.
Equity strategy |
We remain tactically positive on Turkish equities, in particular on the banks: The focus on increasing the credibility of economic policies continues to be supportive for Turkish equities outperformance. Furthermore, in line with our preference for cyclicals/value in EEMEA, we note that MSCI Turkey has the highest exposure to value (64%) of any country in EEMEA and 75% for cyclicals (34pp financials). Despite the rally from October 30 lows, multiples are still trading at a significant discount to five-year and long-term averages. On our estimates, we see potential for c.13% further absolute upside to the index in USD terms assuming a five-year multiples mean-reversion, which we think seems achievable given that NTM ROE consensus estimates are already close to the five-year average.
Excerpt from Morgan Stanley Report, Turkey Economics, Macro and Equity Strategy |Europe
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