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Summary of EM STRATEGY | TURKEY DAILY (19 April 2018)

Core Content

This document provides an analysis of the Turkish financial markets and outlines key economic and market developments expected for the week of 13 April 2018. It includes insights on inflation expectations, foreign exchange (FX) movements, and local and offshore investor behavior, alongside strategic recommendations for bond investments.

Main Points

1. Early Presidential and Parliamentary Elections

• Announcement: The President announced early elections on 24 June, rather than the scheduled November 2019.
• Market Reaction: The USDTRY declined by 2% to 4.02, and the 10-year local bond yield dropped by 35bp to 12.72%.
• Strategic Implication: The strategy recommends buying 10y local bonds (FX unhedged), targeting a yield of 12.5%.
• Policy Expectation: The Central Bank of the Republic of Turkey (CBRT) is likely to hike interest rates next week to avoid currency selloffs before the election.

2. Inflation Expectations to Rise Further

• Survey Release: The CBRT will release the April expectations survey.
• Current Inflation: In the last survey, 24-month inflation expectations were at 8.31%, the second highest since 2006.
• Impact of Currency Depreciation: A recent 8% depreciation in USDTRY is expected to add about 1.5 percentage points to headline inflation in the coming months.
• CBRT Policy Decision: The extent of the inflation increase will be a key factor in the CBRT's future monetary policy decisions.

3. Local and Offshore Investor Behavior

• FX Deposits: Locals increased their FX deposits by USD 0.4bn after selling USD 5bn in the previous four weeks.
• Bond Portfolio: Offshore investors added USD 0.2bn to their bond portfolio, particularly in 10-year fixed coupon bonds.
• Market Trends: The USDTRY rose to 4.19 but stabilized around 4.10, indicating some short-term volatility.

Key Information

Table 1: Turkish Markets at a Glance

• Foreign Exchange Market & Swap Market:

  • USDTRY: Spot rate at 4.0188, down 2.0% day-to-day and 1.9% week-to-week.
  • EURTRY: Spot rate at 4.9808, down 1.7% day-to-day and 1.5% week-to-week.
  • BASKET: 50% USDTRY + 50% EURTRY, spot rate at 4.4999, down 1.8% day-to-day and 1.7% week-to-week.
  • Forward Implied and XCCY Swap Rates:
    • 1m: 12.94, 0.00% change, -0.05% week-to-week.
    • 3m: 13.56, 0.00% change, -0.01% week-to-week.
    • 6m: 13.73, -0.13% change, -0.09% week-to-week.
    • 1Y: 14.34, -0.19% change.
    • 2Y: 14.12, -0.26% change.
    • 1m ATM Vols: 12.11, -0.04% change, -1.65% week-to-week.
    • 3m ATM Vols: 12.64, 0.20% change, -0.90% week-to-week.
    • 1y ATM Vols: 13.42, -0.19% change.

• Local Bonds & Eurobonds:

  • Local Government Bonds:
    • 2Y: 14.02, -0.33% change, -0.53% week-to-week.
    • 5Y: 13.26, -0.25% change, -0.52% week-to-week.
    • 10Y: 12.72, -0.35% change, -0.54% week-to-week.
  • Sovereign Bonds:
    • 10Y (maturity 2043): Price at 81.4, Yield at 6.35%, Zspd at 342.1.
    • 17Y (maturity 2045): Price at 99.5, Yield at 6.64%, Zspd at 372.1.
  • CPI Linkers (B/E Inflation):
    • 2Y: 10.48, -0.29% change, -0.60% week-to-week.
    • 5Y: 9.94, -0.22% change, -0.54% week-to-week.
    • 10Y: 9.60, -0.34% change, -0.53% week-to-week.
  • Corporate Bonds:
    • Isctr 2021: Price at 98.8, Yield at 5.72%, Zspd at 291.0.
    • Garanti 2022: Price at 99.2, Yield at 5.38%, Zspd at 255.0.
    • Akbank 2025: Price at 95.2, Yield at 5.96%, Zspd at 310.3.

Strategic Recommendation

• The strategy recommends buying 10y local bonds (FX unhedged), anticipating a yield target of 12.5%.
• The underweight positioning in Turkish financial assets is believed to be a contributing factor to the market recovery.

Additional Information

Contacts for Emerging Markets Strategy

• Wike Groenenberg: Head of Emerging Markets Research, CEEMEA & APAC London.
• Marcelo Carvalho: Head of Emerging Markets Research, Sao Paulo Latam.
• Piotr Chwiejczak: FX & IR CEEMEA Strategist, London.
• Erkin Isik, CFA: FX & IR CEEMEA Strategist, Istanbul.
• Sai Ulluri: FX & IR CEEMEA Strategist, London.
• Mirza Baig: Head of FX & IR Asia Strategy, Singapore.
• Altaz Daga: AU/NZ IR Strategist, Singapore.
• Kun Shan: China Strategist, Shanghai.
• Tianhe Ji: China Strategist, Beijing.
• Gabriel Gersztein: Head FX & IR Latam Strategy, Sao Paulo.
• Samuel Castro: FX & IR Latam Strategist, Sao Paulo.
• Gustavo Mendonca: FX & IR Latam Strategist, Sao Paulo.

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