Turkey Wake up call: Macro and Political News, 16th January

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 retreated 0.40% yesterdayin small profit taking after its uninterrupted rally of 8.99% during the past six days. After a downtick open, BIST100 tested 121.8k level twice in early hours before turning south in profit taking. But the market was resilient and recovered some of itslosses from its dip at 120.5k. Banks lost 0.54% on average with more pressure on VAKBN, AKBNK, and YKBNK. EREGL, TTKOM, PETKM, TCELL, ENKAI, TKFEN, and ASELS topped the laggards among non-financials while EKGYO, TAVHL, KOZAL, MPARK, and MAVI were some ofthe gainers for the day. Today, our local agenda highlight 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 75bps reduction in the benchmark weekly reporate to 11.25% while the expectations range between 0 and 150bps. We think the chances of a 100bps rate cut in the policy rate to 11.00% are not low at the moment. BIST seems off to a slight negative start as the minority shareholders’ c.USD145mn placementin AKBNK, albeit at a limited 3.9% discount, may somewhat weigh on the banks and the broader market. Lira is stable around the 5.88 mark vs the greenback. U.S. futures are up almost 0.2% in early trades while Asian markets present a mixed picture.
Macro and Political News:
(+) Erdogan and Trump discussed Libya, MidEast and bilateral relations in phone call… President Erdogan and his U.S. counterpart Donald Trump have discussed developments in Libya and the Middle East. The Presidency said late Wednesday that bilateral relationsbetween Turkey and the U.S. were also discussed in the call. The phone call came a day after a statement by an official loyal to the Libyan warlord Khalifa Haftar, which said the cease-fire is over and the war will continue in the country. Forces loyal toHaftar launched missile strikes to the south of Libya’s capital, the military spokesman for the U.N.-recognized Government of National Accord (GNA) said late Tuesday, as the speaker of the pro-Haftar, Tobruk-based House of Representatives Aguila Saleh declaredan end to a cease-fire in Libya late Wednesday.
(=) Turkish and US military chiefs met in Brussels… Chief of General Staff Gen. Yasar Guler on Tuesday met with U.S. Joint Chiefs of Staff Chairman Gen. Mark Milley in the Belgian capital Brussels. The two leaders discussedthe security situation in Syria and the importance of U.S.-Turkish cooperation in the region.
(=/+) Survey forecasts see 75bps rate cut… All eyes are now fixed on today’s MPC meeting at 2:00pm local time as expectations spectrum was indeed divided between ‘no change’ and a ‘25-150bps rate cut’ scenarios inthe 1W repo rate. The CBRT is expected to cut interest rates by 75bps based on Bloomberg median survey results. While nine economists forecast that the bank will not change rates, thirteen participants anticipated 100bps rate cut, one expected 25bps, fiveexpected 50bps, two expected 75bps and one expected 150bps cut. We think the chances of a 100bps rate cut in the 1W rate to 11.00% are high going into publication.
(+) Bond yields retreat to 3-year low after recovery in global risk and domestic indicators… The compound interest of the two-year benchmark has hit a three-year low due to the improvement in global risk appetite, the increased interest in lira assets and the expectationthat the CRBT will continue with interest rate cuts. Following the central bank’s 1,200-basis-point rate cut since July, the decline in inflation and a significant drop in credit default swaps (CDS), the compound interest of two-year bonds declined to around10% from 26%. The yield of two-year benchmark bonds, which has hovered below 12% in the bonds and bills market since the beginning of the year, has fallen below 11% for the first time this week after a long while. The bond yield hit its lowest level sinceDec. 29, 2016, at 10.37% on Wednesday. The decline in bond yields was also due to expectations of further interest rate cuts and CDS falling to 259 basis points Wednesday from its record level of 566 points in September 2018.
Herein note that major central banks on a global scale are on the expansionist side and are keeping risk appetite positive in favour of emerging markets. In tandem, emerging marketshave been experiencing money inflows for 14 consecutive weeks, banking on the U.S.-China trade deal that was scheduled to be signed Wednesday. Also, around the globe, geopolitical risk subjects have stopped and macro outlook remains positive according to thelatest data. All these developments have supported a view of assets denominated in the Turkish lira. The current pricing in the markets continued to run margin for new discounts on the side of CDS premiums, bonds and exchange rates in parallel with inflationtargets. Particularly, positive revisions in macro data support financial stability in global analyses measuring Turkey's production-oriented plan for 2020. Hence, it proves not to be difficult to say that the prospect of a V-shaped recovery has strengthened,which confirms the positive outlook of market players.
While the stock market has risen in parallel with the positive mood in global markets, the levels that bond rates and deposit rates have reached are very important. The outlook alsosupports the stock market side, given the current valuations discounts vs MSCI peers. Unless there is a correction in the lead of the U.S. markets and a major change in geopolitical risk subjects in the internal dynamics, the underlying positive mood seemsto continue. Needless to say, if the benchmark bond yields were to stabilized in the 10-11.5% range and inflation were to keep its positive course, Turkish markets could see further foreign capital inflows in the forthcoming period.
(+) Housing sales number 1.35M in 2019, and 45,500 sold to foreigners… Nearly 1.35 million housing units were sold in Turkey in 2019, while up to 45,500 houses were bought by foreigners, seeing a 14.7% increase compared to the previous year.Istanbul was the top city for foreigners with 20,857 property sales in 2019, while Mediterranean resort city Antalya, the capital Ankara and the north-western province of Bursa province followed with 8,951, 2,539, and 2,213 sales respectively.
Iraqi citizens ranked first in pursuing Turkish properties with 7,596 housing sales. Iranians, Russians, Saudi Arabians and Afghans followed in the top five. In December alone, foreignersbought some 5,300 housing units, up 16.2% on a yearly basis. Nearly 900 houses were bought by Iraqis, some 76 by Iranians and 362 by Russians. Overall, housing sales dropped by 1.9% or 26,669 units in 2019, compared to the previous year. Nearly 511,700 houseswere sold for the first time while the remaining were second-hand sales from January to December.
Along with being a top destination for foreigners, Istanbul – Turkey's largest city by population and one of its top tourist centers – also took the largest share of overall housingsales with 17.6% or 237,675 houses in the year. Official data showed that the capital Ankara and the Aegean province of Izmir racked up 132,486 – 9.8% of all sales – and 79,221 – consisting some 5.9% of the sales – of total housing sales, respectively. Mortgagedhousing sales were recorded at 332,508 – a 24.7% share of all sales over the same period. In December 2019, housing sales rose by 47.7% year-on-year to reach some 202,000 units – 75,480 new and almost 126,600 previously used.
(=) Turkey’s budget posted TRY124bn deficit in 2019… Turkey’s central government budget balance posted a deficit of TRY123.7bn in 2019. Turkey’s budget revenues rose 15.5% to hit TRY875.8bn annually in the January-Decemberperiod. The country’s budget expenditures reached TRY999.5bn in the year, up 20.3% from the previous year. Excluding interest payments, the budget balance posted a deficit of TRY23.75bn in the period, while interest expenditures totalled some TRY99.9bn. Governmenttax revenues reached TRY673.3bn from January to December, showing a rise of 8.3% on a yearly basis. In 2018, Turkey’s central government budget balance had shown a deficit of TRY72.6bn, meeting a year-end target of a 1.9% budget-deficit-to- GDP ratio. Thecountry’s economic program, announced last September, aims to keep the budget-deficit-to-GDP ratio at 2.9% in 2019, 2020, and 2021. Turkish Statistical Institute will release GDP figures in March.

Sector and Company News:
(=/-) Minority shareholders of AKBNK will sell up to 101.1 mn lots of shares which constitutes the 1.9% of the company by accelerated bookbuild offering. We consider that it could be slightly negative for the share price.

(=) VAKBN sold 27mn lots of its GUSGR shares between TRY2.28-2.45 per share. Its shares in GUSGR declined to 51.10%.

(=) HALKB sold 1.5mn lots of its own shares that previously bought back, with TRY6.76- 6.81 pricerange per share.

(-) PGSUS / According to news in airporthaber, Directorate General of Civil Aviation releaseda notice about the flights from Sabiha Gokcen (SAW), declaring that because of the current capacity constraints, no new additions to the current flights will be permitted. We expect the news to have an initial negative impact on Pegasus as SAW is the mainhub for the company. Recall that company announced its 2020 guidance recently and accordingly they were planning to add 10 new airplanes in the current fleet in which some of them were planned to be allocated in SAW. This development has potential to dentthe company’s growth plan for 2020, thus we will be closely monitoring if this development causes an important downward revision in the growth prospects of the company for 2020.

(+) TAVHL CEO Sani Sener declared that TAVHL is preparing for a bid for Antalya Airport expansion project tender with its partner Fraport. Recall that, a tender notice released in the Official Gazette earlier this month for capacity increases and concession rights of Antalya Airport. We believeit would be a potential catalyst for TAV if it wins the tender together with Fraport.

(=) TCELL announcedthat the company’s three subsidiaries signed an agreement to transfer their total shareholding of 55% in Inteltek to the other shareholder of Inteltek, Intralot Iberia Holding SAU. The transaction is expected to be completed in 1H20 and the value will be determinedbased on IFRS net book value of Inteltek. We deem the news neutral for Turkcell as no material impact is expected on the company financials from the stake sale.
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