Page 87 - TURKRptMay19

All-in-all, Turkish markets are more heavily dominated by vulture funds at the moment. That was the growing case as cynical observers contended the country was in an escalating descent to complete banana republic status, but the Erdogan administration’s latest moves to freeze lira liquidity on the London swap market prior to the local polls to steady the lira totally spooked long-term investors in Turkish markets and left the ground free for short term hit-and-runners. The lira and bonds are following highly volatile paths in their relatively supressed channels. Stability in Turkish markets, and in the country’s political direction on all fronts, is not looming on the visible horizon as Erdogan is in need of more tension and the kicking up of more dust to obscure his election defeat. He has no real time to focus on deteriorating economic conditions. “After the strong start, one and a half weeks were enough to burn off almost the entire annual profits of the BIST 100, which seems to have put the Turkish stock market back down to earth. The collapse of the BIST 100 is a reflection of the structural weakness as well as the currently prevailing uncertainties about Turkey's future domestic and economic policy,” Raiffeisen Research said on April 2 in a research note entitled “Turkish stock market – Back down to earth – Drop follows strong start – Valuation favourable – Political risks dominated”.
Stock market: Raiffeisen sees nothing to sustain new gains. Although the Turkish stock market appears to be of interest primarily from a valuation point of view following the recent correction, Raiffeisen believes that there are currently no factors that would enable a sustained price increase. “In the longer term, the Turkish economy could begin to recover in H2 2019, which, assuming no further political misconduct, should lead to a return to growth of 3-4% in 2020—which basically speaks for the stock market. At the same time, however, the next downturn in the US economy is likely to start pricing in towards the end of 2019, which means that stock markets in general are likely to face more headwinds.” Raiffeisen therefore left its rating for the Turkish stock market at Hold. “In hard currency the BIST 100 even slipped back into the red. Now that no further impulses can be expected from US monetary policy for the time being, the initial euphoria seems to have disappeared. Not only is the Turkish economy in recession, but the domestic political situation also remains difficult. In view of continuing high inflation and rising unemployment, the government has made every effort to prevent at least another collapse of the currency before the election date. Turkish banks have been instructed not to lend money to foreign business partners—a measure that creates mistrust among international investors,” Raiffeisen also noted, adding: “The combination of political risks and mismanagement in economic policy is a big challenge for the currency and the Turkish stock market. While global stock markets continue to be driven by the positive news flow of recent weeks (US monetary policy, trade conflict) and solid fundamentals continue to provide support, political uncertainties and economic concerns dominate in Turkey.” The temporary easing on the capital market was due, among other things, to the Turkish central bank, which, contrary to Erdogan's will [at least his publicly stated will—Editor’s note], drastically increased the key interest rate on account of the country's economic and financial weaknesses and the lack of investor confidence, thereby stopping the currency's decline for the time being, according to Raiffeisen. However, the political uncertainties resulting from the local elections are putting the currency under renewed pressure. In general, Raiffeisen continues to see geopolitical and domestic risks, which can cause increased volatility in the lira, as a challenge for investors in hard currency. “Turkish credit default swaps are a good proxy for country risk and have a high correlation with the Turkish equity market. The same applies to the volatility of the Turkish lira. The rise in both the CDS and the volatility of the currency accordingly implies that the market prices a high degree of risk.”
GDP forecasts revised downwards. The after-effects of last year's currency crisis continue to be felt in the country's economy, with the result that Raiffeisen expects a further economic contraction in 2019. While the consensus initially estimated GDP growth forecasts for 2019 at a relatively
87 TURKEY Country Report May 2019 www.intellinews.com