Worst Not Over For Equities


Despite falling 7.5% since December 16, we see further downside to Turkish equities, as deteriorating macro fundamentals and heightened political uncertainty are likely to weigh heavily on stocks in the coming months.

The Central Bank of Turkey, hesitant to enact further monetary tightening or abandon its unorthodox policy, is quickly running out of options to avert a destabilising sell-off in the Turkish lira. The currency has depreciated 3.4% against the US dollar and 2.5% against the euro since a wide ranging graft probe on December 18 shook investor's perceptions of political stability in the country ( see 'Major Implications Of AKP Rift' December 19). This brings the cumulative depreciation of the lira since May to 17.2% and 22.4% against the US dollar and euro respectively, raising debt-servicing costs in Turkey's externally leveraged private sector, where non-financial corporations hold a net-short FX position of approximately 20.2% of GDP.

The graft allegations coincided with the US Federal Reserve's decision to taper its pace of monthly asset purchases by US$10bn, exacerbating the sell-off in Turkish assets already underway due to rising US yields. The lira fell to an all-time low of TRY2.0942/US$ on December 20, prompting CBRT governor Erdem Basci to raise the amount of US dollar sales conducted by the bank to as much as US$500mn, despite its level of net international reserves falling to an estimated 2.3 months import cover. We reiterate our view that in the coming months the CBRT will have to hike rates more aggressively in order to stem the lira's decline, as this level of FX sales could quickly prove unsustainable if the sell-off continues. Although this would provide some relief to private sector debtors, it would imply a further deterioration of the country's growth outlook that would weigh heavily on equities, particularly banking stocks which make up 35.3% of the weighting on the BIST.

Sky's The Limit
TRY/US$ Exchange Rate

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This article is tagged to:
Sector: Country Risk
Geography: Turkey

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