Turkey Wake up call: Macro and Political News, 19th February

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distributor of this analysis and has not introduced any material changes to the content of this analysis or any recommendation included herein.

Wake – up call

BIST lost 1.01% yesterday along with global peers as well as renewed geopolitical concerns related to Syria and Libya. Apple warning on its business outlook due to the coronavirus impact led to a downtick start that marked the highest point of the day for the BIST100 index that floated within the 119.6-120.2k band until around 4:15PM. Arab media reports claiming that a Turkish cargo ship at the Tripoli port was hit by rockets led to further selling pressure, followed by some recovery as the claims turned out to be false. Banks fared slightly better than the broader market with their sector index dropping 0.86% amid ISCTR and AKBNK outperforming and YKBNK and the two state lenders lagging. ASELS, ENKAI, ULKER, CCOLA, ANACM, and GUBRF were some of the rare gainers while TUPRS, THYAO, AEFES, TAVHL, FROTO, KRDMD, and EREGL topped the decliners. Today, our macro agenda focus will be the monthly Monetary Policy Council meeting with the decision on policy rates due 2PM local time. Consensus (Bloomberg survey) calls for a median 50bps reduction in the benchmark weekly repo rate to 10.75% while the expectations range between 0 and 75bps. BIST seems off to slight positive start given some gains in Asian markets as well as U.S. futures (+c.0.3%) in early going while lira is flattish around the 6.0670 mark vs greenback.
Macro and Political News:
(+) Trump says working on Idlib plan with Erdogan… U.S. President Donald Trump said late Tuesday that he has held Syria talks with President Erdogan, underscoring that they are working together on Idlib. Recall, President Erdogan said last week that Turkey would hit all targets it deemed an immediate threat, reiterating that Turkey expected the Assad regime to retreat behind the observation posts by the end of February or face the consequences. Turkey has been reinforcing its observation posts in Idlib following two attacks by the Assad regime forces, which left 13 Turkish soldiers and a civilian dead, and 45 others injured.
(=) Turkey demands return to Sochi agreement terms for calm in Idlib… Presidential Spokesperson Ibrahim Kalin said late Tuesday that the main objective is to return to the terms set forth by the Sochi agreement for Idlib. Kalin added that Russia’s proposals during the Idlib talks have so far proved unacceptable for Turkey. The official also underlined the need for the Assad regime to desist from attacking the war-ravaged town. He stressed that the crucial issue for Turkey is the recognition of borders set by the observation points, and the cessation of attacks by the Assad regime.
So far, Turkey has carried out three cross-border operations in northern Syria to eliminate terrorists near its borders in order to secure national security, aid in the safe return of Syrian refugees and ensure Syria’s territorial integrity. These military operations came as individual efforts when Ankara’s legitimate security concerns were not relieved by strategic partners despite constant warnings.
(+) Turkey and Russia hold new round of talks to resolve Idlib crisis… The second round of the Turkish-Russian consultations, looking to ease the tension in northwestern Syria’s Idlib, began in Moscow Tuesday. The Russian delegation and the Turkish delegation, headed by Deputy Foreign Minister Sedat Onal, met to find a solution to the recent escalation in violence in Idlib’s de-escalation zone. In addition to the diplomats, both delegations included intelligence and military representatives. According to diplomatic sources, the Turkish delegation stressed the need to quickly defuse tension and reduce the fighting to prevent further worsening of the humanitarian crisis in the region. Another point on the agenda includes measures that could be taken in Idlib to ensure full implementation of the agreements reached under the Sochi deal.
(+) Joint Turkish-Russian patrols resume in northern Syria… The Turkish and Russian militaries have resumed holding joint patrols in the area near the Syria-Turkey border, reports said Tuesday. The Turkish military and Russian military police held a patrol in the Northwestern Syria. The patrols are scheduled to be conducted in an area 10 kilometres into Syrian territory. Recall, Ankara and Moscow agreed to conduct the joint patrols during high-level talks between President Erdogan and Putin in Sochi on Oct. 22. However, the joint patrols were cancelled after Assad regime forces targeted Turkish troops in Syria’s Idlib.
(= 3D/-) Volkswagen to announce decision on Turkey plant by midyear… Volkswagen has once again postponed its decision on whether to build a car plant in Turkey, a source told Reuters on Tuesday after the company halted the process amid international criticism of Ankara's military operation in northern Syria. The undisclosed official said that they still have time and can certainly make that decision by midyear. Recall, Volkswagen said in December it would likely decide on the investment in February. As time went on, multiple rumours on who will host VW's new plant have hit the headlines. Initially, the company’s list of potential hosts included five countries but has since narrowed the choice down to Turkey and Bulgaria as the most likely locations.
(=/+) The CBRT expected to cut rate again… The CBRT is expected to lower its policy rate again Wednesday, according to multiple polls this week. The decision would mean a sixth consecutive cut in an aggressive easing cycle aimed at boosting economic growth. A median estimate in a Reuters poll of 15 institutions for the 1W repo rate – also known as the bank’s policy rate – after the central bank’s meeting on Wednesday (today) stood at 10.75%, reflecting a 50bps cut. A rate hike was not among the forecasts, which ranged from no change to a 75bps cut in the benchmark rate.
Seven out of 21 economists surveyed by the state-run Anadolu Agency expected no change in interest rates, while the remaining 14 economists forecast a drop in the rate, ranging between 25 and 75bps. Three economists expected 75bps, nine expected 50bps and two expected 25bps. The median estimate for the policy rate at year-end in the Reuters poll stood at 10%, with estimates ranging between 12.5% and 9.0%. Recall, the bank cut its key interest rate to 11.25% last month on the back of the stabilizing Turkish lira and a drop in inflation.
(+) House prices increase nearly 10%... The house price index increased by 9.92 percent in December 2019 from the same month of the previous year, data from the Central Bank have shown. The annual rise in house prices was lower, at 7.2%, in November last year. In real terms, house prices went up by 1.71%. On a monthly basis, house prices across Turkey exhibited a 1.41% rise in the month, accelerating from the 1.09% increase recorded in November 2019. In Istanbul, house prices rose a 3.7% in December last year from a year earlier while the property market in the capital Ankara saw an annual increase of 10.13% in house prices. The data also showed that house prices in Izmir, Turkey’s third largest city, were up 10.26% on an annual basis. The residential property index for new dwellings for Turkey increased by 10.73% in December from a year earlier, while the annual increase in the index for existing properties was 8.78%. The latest data from the Turkish Statistics Institute showed that residential property sales in Turkey surged 55.8% year-on-year in January. A total of 113,615 houses changed hands in January, up from 72,937 the previous year. Istanbul captured the largest share in total sales with 21,200 units, or 18.7% share.
TurkStat also reported that mortgage-financed residential property sales soared 546% on an annual basis to 42,000 units in January, which accounted for a little more than 37% of all home sales. The number of mortgage-financed sales in January marked the highest figure for this month over the past eight years. The strong sales in this category were the result of the decline in interest rates on housing loans. Recall, in 2019, a total of 1.35 million residential properties were sold in Turkey, down from 1.38 million units in 2018. Mortgage-financed home sales, however, rose 20% from 2018 to 333,000 units.

Sector and Company News:

(=) ENKAI bought 832k lots of its own shares with TRY6.77-6.80 price range per share.
(=) TKFEN announced a second arbitration decision regarding the Great River Project that was undertaken in Libya by Tekfen TML Joint Venture (TTJV) in which the company’s subsidiary Tekfen Construction has a 67% stake. Recall that the project had been halted for an indefinite period of time owing to events arising on 21 February 2011 in the country, and the arbitral tribunal ordered project's employer authority Libyan Man-Made River Authority (MMRA) to pay USD 45,498,649 and that TTJV would commence the enforcement process for the said sum. The second arbitral tribunal decided that it had jurisdiction to entertain the claims, but that, contrary to TTJV's claim, Libya did not breach its obligation with respect to protection and to equal treatment under the Reciprocal Promotion and Protection of Investments (RPPI) between Turkey-Libya and customary international law. As part of this decision, the arbitral tribunal held TTJV liable in the amount of GBP2.7 mn for Libya's litigation costs. TTJV has commenced initiatives to have this amount be deducted from the damages awarded in favor of TTJV. Tekfen Holding also added that the talks with the relevant Libyan administration MMRA for the collection of the contract based arbitral award are still ongoing. We deem the news to have a neutral effect at this stage as there is still no concreate payment plan about the matter
(+) ASELS and Havelsan signed a contract with STM Savunma Teknolojileri within the scope of Milgem 5 project. Aselsan will have TL 664mn of backlog from the contract. Deliveries will be held between 2021-2023.
(=/-) FROTO management will propose TL2.65 DPS to its AGM, yielding 3.4% and 53% pay-out ratio. Our pay-out ratio estimate was 75%. (Expected date 23rd March 2020)