Monday is “write your own Turkish lira jokes” day.
Thanks in part to President (and newly appointed Sultan) Recep Tayyip Erdoğan and more specifically to his penchant for putting on his rates/FX strategist hat, the poor lira often ends up being the butt of market jokes.
One of my personal favorites on days when the currency is in free fall is: “go home lira, you’re drunk.”
Well on Monday, everyone has an opinion on what Erdogan’s referendum win presages for the currency. Make no mistake, this isn’t something esoteric that needn’t concern average investors. This has very real implications for emerging markets and as you’re well aware, emerging markets have an annoying habit of finding their way into each and every discussion one cares to have about DM policy normalization.
Here’s where we stand heading into the open on Wall Street:
Below, find a rundown of analyst opinions on where the lira goes next following “the great sultan rally” and how you should expect Turkish assets in general to perform in the weeks ahead.
- The narrow margin of victory may be seen by markets as an argument against early elections, “for it might imply an erosion in AKP’s parliamentary majority,” Inan Demir, economist at Nomura Plc in London, said by email
- Expects to see a relief rally in TRY and a steepening pressure on the yield curve, but the extent of the advance will depend on the possibility of early elections or a cabinet reshuffle, the timing of monetary easing and Turkey’s relations with Western allies, he says
- Sees non-negligible risk of early elections, expects political pressure on central bank to ease policy to “build pretty swiftly”
- “The referendum campaign was dominated by a strong anti-Western rhetoric and repeated promises to bring back death penalty. One hopes that this rhetoric will be tempered now that the vote is over”
- AKP losing in major cities will not motivate them to “consider early elections whatsoever. Therefore early election fears are no longer valid,” Ozgur Yasar Guyuldar, head of equity sales at Raiffeisen Centrobank AG in Vienna, says by email. “Positive for local assets in the short term”
- Initial response to “the reasons of weaker referendum outcome” will be to stimulate economy, he says
- Expects investors shifting their attention to economy, attractive valuations and pricing in the removal of uncertainty
- The outcome removes prevailing uncertainty in Turkish politics, “at least in the short-term,” says Rabobank’s Piotr Matys, who sees scope for lira to rally to 3.5561 vs dollar
- Says the lira, which has been the worst performing EM currency this year, could become the best-performing in H2 if domestic situation stabilizes
- This view on the lira assumes that the “yes” vote will not be followed by snap elections, “at least not within next few months and that the AKP and President Erdogan will focus on unifying divided nation,” he says
- Says one potential risk is that tensions may escalate “significantly,” given that the opposition has “already implied that the very close results may have been manipulated”
- Big question now is “what the president will do with his new powers,” Nordea analyst Anders Svendsen writes in e- mailed note.
- Lira is likely to show “more volatility than trend in the near term, but will strengthen gradually during the year as political uncertainty is gradually reduced,” he says
- Re-introducing the death penalty could be put to another popular vote, he says
- Interest rates seen “high enough to support TRY amid the political risks”
- “Brief relief rally is likely to take USD-TRY below 3.60,” Tatha Ghose, senior EM economist, writes in note “CDS spreads could fall closer to 215bps in the near-term”
- “But, such moves are unlikely to last for long,” he says. “Markets are likely to turn their focus back on Turkey’s bigger political challenges – its relation with the U.S. and Russia, the challenges at the Kurdish border, and its relations with the EU”
- The market would like the continuation of stability, declining chances of an early election and “the tight call on the referendum that may contain any market unfriendly moves,” says Ozgur Altug, the chief economist at Istanbul- based broker BGC Partners
- As for the benchmark stock index a “Yes” vote is likely to be cheered by the market, “but we do not expect a major breakout,” he says
- Turkish equities are not likely to trade above historical averages as economic growth remains subdued and “long term implications of the presidential system remain untested”
- Expects the upside in equities to be limited at around 7%, “corresponding to 96k for BIST100”
- Garanti, Isbank, Kardemir, Migros, Petkim, Trakya Cam, Tupras, Turk Traktor and Vakifbank seen doing well in the relatively cheerful post referendum environment
“Our base case remains that there will be limited structural reforms to boost productivity growth or competitiveness and thus the currency will remain weak in order to prevent a widening in the current account deficit,” say Morgan Stanley economist Ercan Erguzel and EM strategist James Lord in emailed report.
- Bear case for TRY will emerge if early elections are called, despite the referendum victory, and/or question marks are raised about central bank’s ability and/or willingness to keep interest rates high
- Bull case for TRY will emerge if relations with foreign partners improve notably and/or domestic political uncertainty drops to an extent that allows strong reform momentum to result from the new political framework
- Due to ongoing concerns about the inflation outlook, “we expect the CBT to maintain a tight monetary policy stance until there is a significant improvement in inflation and/or sizeable TRY appreciation”
- “Due to constraints on monetary policy, we expect the main support to economic growth and employment to come in the form of counter-cyclical fiscal policies”
- Uncertainty regarding the French elections could also limit risk appetite for TRY in near term