The Turkish lira on January 23 tested below 5.30 to the dollar for the first time since computerised yen trading on January 2 brought the world’s first ‘flash-crash’ of the year. The benchmark BIST-100 index on the Istanbul stock exchange, meanwhile, got past the 100,000 threshold for the first time since last October.

The day also saw the 3-month implied volatility of the Turkish lira (TRY) decline to 17.30 from as high as 45 last August—which brought the worst of Turkey’s currency crisis—on a rising investment appetite for emerging markets seen since December, Reuters reported.

“A year ago, many were saying the Turkish Lira was undervalued, when the credit boom & current account deficit said the opposite. I'm hearing similar undervaluation calls now. Yes, current account is in surplus, but that's the recession & not structural. Fair value for $/TRY remains 5.50,” Robin Brooks of the International Institute of Finance (IIF) said on January 18 in a tweet.

However, Tim Ash of Bluebay Asset Management, a lira bull, did not like Brook’s fair value. He replied: “‘Fair’ value for currencies is always fraught with difficulty. I always think people forget it’s a market with buyers and sellers, lots of moving parts.”

Investors in New York discuss turnaround
The Financial Times reported on January 20 that investors in New York were talking about a Turkish turnaround.

Ozgur Yasar Guyuldar of Austria's Raiffeisen Centrobank, who hosted an event bringing 30 investors—including portfolio managers and analysts from Goldman Sachs, Macquarie, and AllianceBernstein—together with executives of Turkey’s Akbank, Koc Holding and Mavi Jeans, told the newspaper that talk of politics was "definitely secondary".

“It's understandable that not all ground can be covered in such a short amount of time, and nor is there likely to be much willingness on the part of local executives to talk freely about issues so far out of their control, as one portfolio manager in attendance remarked. But considering the central role that [Turkish President Recep Tayyip] Erdogan played in exacerbating the [currency] crisis last summer and the fact that parliament just granted him emergency powers over the economy, any discussion about Turkey's investment prospects should start and end with him,” Colby Smith of the FT wrote.

Smith also underlined how the bond investors were serious about keeping the incredibly high real interest rates. He quoted Ash as saying: “Cutting [the policy rates] too early would risk more carnage for the [lira], and [put] the currency back into the death spiral which threatened back in the summer—meaning deeper recession, higher inflation, and macro destabilisation.”

The BIST-100 saw as low as the 87,000s on January 3 after closing 2018 at 91,270. The banking stocks index has been the engine of the recent market rally, rising from the 110,000s on January 3 to the 132,000s on January 23.

The country’s largest mobile operator Turkcell, refiner Tupras and private lender Garanti Bankasi have led the Borsa Istanbul gains since the beginning of January, Bloomberg reported on January 23.

VTB Capital’s target price for Turkcell stands at TRY15 while the telco’s shares were down 0.21% d/d to TRY14.49 on January 23. The Turk Telekom target price of VTB is TRY4.4. Its share prices was up 1.42% d/d to TRY4.28 on the day.

“Turkcell demonstrates appealing double-digit growth and will generate more cash this year. Turkish macro has been tough, though, for the domestic business of Turkcell,” VTB said on January 21 in its CEEMEA Telecoms report, adding: “Turk Telekom has a high beta to the lira. High FX exposure weighs on dividends and 
increases financial costs (through hedging).”

‘Erdogan-type bank bailouts’
Public lenders’ moves to restructure credit card debts at well below market rates, brought in at the prompting of the government in advance of the March 31 local elections, are being sold as Erdogan-type private bank bailouts while the central bank’s decision to keep rates stable at 24% on January 16 was also seen as supporting local lenders.

High policy rates helped pull the local currency back from testing the 5.50s and they are helping to keep inflation under control, with both developments in favour of local lenders.

High policy rates have also pushed 10-year lira bond yields to below 16% for the first time since June. The Treasury returned to its regular domestic borrowing approach in January after cutting its lira borrowings in November and December with the aim of supressing interest rates on the domestic market 

The Treasury has borrowed TRY5.7bn from the domestic market in January. It previously announced that it planned TRY6.1bn of domestic borrowing in the month versus debt redemptions of TRY6.4bn.

February and March are set to be critical as the Treasury is planning TRY21.8bn worth of domestic borrowing in February versus TRY22.7bn worth of scheduled redemptions. In March, it plans TRY14.4bn of borrowing on the domestic market versus redemptions of TRY15.3bn.

“#Turkey's 2028 lira bond up 35%, 2028 $ bond up 20% since the August dip, beating country's other asset classes by far,” Fercan Yalinkilic of Bloomberg wrote on January 23 in a tweet.

Albayrak’s pinkish comments
Despite positive market sentiment towards Turkish assets, Finance Minister Berat Albayrak’s pinkish comments on the economic outlook are beginning to catch a reaction from market players.

Albayrak said on January 23 that disagreements with the US, including over Halkbank which was caught up in an Iran sanctions-busting court case, will be resolved soon and that Ankara does not expect recession or negative growth.

“We do believe that Turkey will be hit with recession, and do not share that view. It’s a bit surprising their stance given from our sources we know policymakers are at consensus over the country going into recession,” Morten Lund of Nordea Markets told Reuters, commenting on Albayrak’s expectations.

Turks on the high street might also not agree with the finance minister. While consumers again complained about high food prices, a factor in Erdogan calling on companies to cut profits if necessary to help citizens, the consumer confidence index remained close to its record low levels for the fifth consecutive month in January.

National statistical institute TUIK on January 23 released only seasonally adjusted consumer confidence index figures. The seasonally adjusted consumer confidence index deteriorated by 0.2% m/m in January after falling 2.2% m/m in December.

The central bank still provides the usual unadjusted data series. That shows the consumer confidence index remained below the 60 level for an uninterrupted five months from September to January. It was the first time consumer sentiment had stayed below 60 for such a long period, and included the record low level of 57.3 in October.

“Recently released data show that the rebalancing trend in the economy has become more noticeable,” the central bank’s monetary policy committee (MPC) said on January 23 in the minutes of its latest meeting held on January 16, adding: “Slowdown in economic activity continues, partly due to tight financial conditions. Although there has been some improvement in financial indicators recently, loan demand and supply remain subdued. Leading indicators have yet to show signs of recovery in domestic demand. The extended tax cuts for durable goods are likely to spur consumer demand in the first quarter. However, the weak labour market will continue to curb aggregate demand.”

IMF agrees with the consumer
The IMF seems to agree with the Turkish consumer, the central bank and Lund of Nordea rather than Albayrak.

“Economic activity in emerging and developing economies is also projected to tick down to 4.5 percent in 2019, with a rebound to 4.9 percent in 2020. The projection for 2019 has been lowered (0.2 of a percentage point) from October mainly because of a large projected contraction in Turkey, amid policy tightening and adjustment to more restrictive external financing conditions,” the IMF said on January 21 in an update to its latest regular World Economic Outlook report released in October.

According to the latest available Turkish growth forecast, taken from the October outlook, the IMF anticipates 0.4% of GDP growth in the country this year.