Capitalising on Global Trends…

The state of indecisiveness that characterised market sentiment in the early months of the year has given way to drastic changes in pricing as of the end of the first quarter. Apprehensions as to the strength of global recovery and Bank of Japan’s unprecedented quantitative easing decision have set the stage for dramatic declines primarily in commodity prices and long-term bond yields. This, on the other hand, sets an extremely supportive backdrop for Turkey’s economy and financial markets. Continuation of easy global liquidity conditions -- at a low cost -- and not leading to a bubble in asset prices is probably a dream scenario from Turkey’s perspective.

It appears that sub-potential growth once again in the first quarter and a downward course in commodity prices, most notably oil, will lead the deterioration in Turkey’s foreign trade and current account balances -- triggered by the recovery in domestic demand -- to be contained. It seems to us that the most recent decisions by the CBT are intended entirely “to weaken the link between capital flows and domestic macroeconomic variables such as credit and current account deficit”, and that the monetary authority has been relieved of the pressure from rate cut expectations, thanks also to a supportive global backdrop. We continue to believe that this general outlook reinforces credit rating upgrade expectations, potentially allowing agencies other than Fitch the opportunity to raise Turkey to investment-grade category.

Looking at the current state of affairs, the principal leading indicator, PMI indices, have continued to drift lower in March on a global scale, following the retreat in February, which attests to the slowdown in global recovery. As for the Turkish economy, growth in 1Q13, albeit definitely above the previous quarter, will nonetheless continue to undershoot potential growth rate. We did acknowledge that these developments could somewhat weigh on 2013 growth perceptions, though it is noteworthy that expectations still remain unchanged at 4.2% levels, based on survey findings. Despite a minor increase in YE13 inflation expectations towards 6.6%, 12- and 24-month forward looking inflation expectations remain closer to 6.0%. Nevertheless, considering the appreciation pressure on the TRL and sliding commodity prices, a deterioration in inflation expectations appears quite unlikely, in our view. Finally, these developments warrant minor changes to our forecasts, which we also provide in this report.

As for markets, we attach significant likelihood to a retest of earlier record highs for the BIST in the short term, buoyed by Moody’s rate hike expectations. Even in the event that expectations are fulfilled, however, we see it likelier for the market to switch to more of a range-bound trading pattern. Regarding interest rates, intervention by the Bank of Japan and actions by the CBT -- keen not to miss this opportunity -- have created a drastic change in outlook. While we continue to expect interest rates to follow an upward slope until the year end, compared to our earlier forecasts, we now expect increases to be more gradual and limited in magnitude. On the exchange rates front, given renewed intent by the CBT to take all measures necessary to surmount any pressure from capital flows, we continue to expect the currency basket to fluctuate within a band of 2.05 - 2.15 throughout the year, and not to dip below the 2.05 mark.