Markets: Turkey and MSCI EM Spread Analysis

In Turkey, as we postulated last week, we are bullish primarily because valuations are extremely attractive in our coverage universe; 12-month forward valuations show Price-to-Book at 1.33x and Price-to-Earnings at 10.59x.

1 year spread analysis shows us that with respect to MSCI Emerging Markets Index, it is currently 2 standard deviations below the mean before the mean reversion kicked in post elections.

turkey and msci em

Source: Bloomberg

Switcheroo (Market Wrap- June 21st)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa


Author: Kunal Damle

A mixed week comes to an end with most of the stock markets at multi-year highs but with mounting concerns coming in from multiple fronts, it doesn’t seem like it is going to get any easy.

With the FOMC out of the way, most emerging markets heaved a sigh of relief that the rate increase rhetoric is more subdued than one expected. We expect one rate rise before the end of this year, but more subdued increases going into 2016. With commodity prices having come off and inflation under control, the risk to USD will weigh on the Fed’s mind than anything else.

Most emerging markets (EM) saw the dovish stance of the Fed as a breather to rally on. Both the Nifty and Sensex in India rallied with even monsoon looking like being normal. In Turkey, as we postulated last week, we are bullish primarily because valuations are extremely attractive in our coverage universe; 12-month forward valuations show Price-to-Book at 1.33x and Price-to-Earnings at 10.59x. South Africa closed up 1.86% on the back of a strengthening Rand.


Source: Bloomberg

Closer to our region, last week marked the beginning of the Holy Month of Ramadan. Markets have historically tended to be very light on volumes and with Ramadan coming in during the summer months would put even more pressure on the markets. The Saudi Markets opened to foreign investment last week, which as we expected was a very tepid event. Look forward to Saudi markets seeing more profit taking with no triggers in place. We see markets being flat, low on volumes till mid – July.

The coming week look far murkier with Grexit now looking imminent. Emerging markets looking ripe for an downward correction while look to USD strength against most EM FX.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.


Steepening Turkey 5Y USD CDS


Source: Bloomberg

Going Cold Turkey?


Author: Tanya Rawat

Published in Global Risk Insights

İstanbul’u dinliyorum, gözlerim kapalı
Önce hafiften bir rüzgar esiyor;
Yavaş yavaş sallanıyor
Yapraklar, ağaçlarda;
Uzaklarda, çok uzaklarda,
Sucuların hiç durmayan çıngırakları
İstanbul’u dinliyorum, gözlerim kapalı.

These lines are from a beautiful poem by Orhan Veli Kanık which translates to:

I am listening to Istanbul, intent, my eyes closed;
At first there blows a gentle breeze
And the leaves on the trees
Softly flutter or sway;
Out there, far away,
The bells of water carriers incessantly ring;
I am listening to Istanbul, intent, my eyes closed…

The Black Sea on the North gently caresses Constantinople (present day Istanbul) via the Strait of Bosphorus, Aegean Sea kisses the shores of Smyrna (present day Izmir) on the West and the Mediterranean Sea bathes Antalya in the South. Geographically magnificent, people with genteel attitudes and gracious hearts, Turkey is an enigma.

My ideal kahvaltı (Turkish breakfast) is a plate of beyaz peynir, zeytin, sucuklu yumurta, butter, honey, sliced tomatoes, cucumber, some börek and Turkish tea. If this sounds rich to you, the history is doused with even more flavour and aroma, as one tries to flip through the pages of Byzantine and Ottomon Empires.

After the Ottoman’s faced defeat in World War I at the hands of Allied forces, a brave Turkish military officer who served during WWI led the Turkish War of Independence against Allied occupation and is credited with founding the Republic of Turkey. He was bestowed with the title Atatürk meaning ‘Father of the Turks’. He is Mustafa Kemal Atatürk who wanted a modern Turkey, wanted to embrace tolerance, wanted an open-minded society, wanted secularism. However, maybe he went a wee bit far and too swiftly in trying to change a country with deep Muslim roots by challenging its Muslim ideologies such as banning headscarves in public because he disdained a society prejudiced on the basis of what religion or practices one followed.

Subsequently, to his detriment, right-wing parties took advantage of this position and tried to exploit this during a rather tumultuous phase for Turkish politics during the 90s wherein Islam was ‘reborn’. The common Turks had enough though as the Lira depreciated alarming and inflation reached astronomical figures. The Turkish economy was hemorrhaging when a minnow emerged victorious in the 15th Turkish General Elections; the AK Party. It talked about European Union membership and it spoke moderately. Led by Recep Tayyip Erdoğan, it was indeed a watershed moment for Turkey. This was the paradigm shift it desperately needed. His era saw income per capita rise to $10,900 from $2,000 since the early 1980s, double digit inflation figures of 65% which plagued 80s and 90s fell off a cliff to ridiculously normal levels.

Foreign exchange reserves excluding Gold grew from $4bn in the early 80s to $110bn. Government debt has fallen from 80% to ~35% of GDP. Structurally though, problems persist. While the Foreign Direct Investment remains constant at 1.5%, Current Account Deficit (% GDP) continues to dwindle downwards, averaging  -6%. The chronic low savings rate doesn’t help either; averaging 15% in the 21st century versus a world average of 23%. It has to rely on external funding of which short-term external debt (% reserves including Gold) is dangerously high at 98%. With an imminent interest rate hike by the Federal Reserves, Turkey remains vulnerable to hot-money outflows.

Erdoğan now needs to see the light of day. After taking up position as President of Turkey (a merely ceremonial position) post exhausting his term as Prime Minister in 2014, he had hoped AK Party to win the June Parliamentary elections 2015 to tweak the constitution enabling the President greater powers. He is a visionary, yet visionaries too sometimes lose their way. Here is man who by his mere beliefs changed Turkey and today post elections, he is faced with the prospect of going Cold Turkey (the term Cold Turkey implies abrupt and complete cessation of taking a drug to which one is addicted) on 13 years of unadulterated, absolute power. He needs to make peace with it.

Turkey needs less populist policies and more austerity, less interference in the functioning of the Central Bank thereby restoring its credibility in the financial markets and eyes of the investors, policies encouraging savings rate in a country whose demography is its strength (average age is 29 years old) and to preserve what Atatürk and Erdoğan dreamt of – a strong, educated and secular country whose strength is its calm yet resilient demeanour.

İstanbul’u dinliyorum, gözlerim kapalı..

Sharma, R. 2012, Breakout Nations, Penguin Group, London.

International Monetary Fund. Available from: <;. [13 June 2015].

Trading Economics. Available from: <;. [13 June 2015].

World Bank. Available from: <;. [13 June 2015].

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.


No Monkey Business (Market Wrap- May 31st)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa 


Author: Tanya Rawat

“Now I’m the king of the swingers, the jungle V.I.P,
I reached the top and had to stop” starts the beginning verse of the catchy Jungle Book track “I wan’na be like yo…” made immortal by Louis Prima.

In the same rambunctious flavour, expect the markets to show chutzpah this week with Turkey getting the party started with pre-partying already reaching crescendo in the latter end of May (USD terms); the Borsa Istanbul 100 Index lost ~9.30% as polls conducted by trusted agencies showed the AKP (viewed by many as pro-market) losing ground to opposition. Ahead of the June 7th elections, expect the downward slide to continue with Benchmark 2Y bond yields at close to 1Y highs at 9.85% and 5Y CDS at 220 bps. Additionally, Turkey equity markets have a strong negative correlation with the US 10Y Tsy yields which are creeping up to 1Y highs on strong economic data from the US.

The S&P looks stronger, the VIX at 13 levels, Dollar strengthening expected as US 10Y Tsy yields expected to rise further as the economic makeup improves in the US. Expect Gold to be flattish around $1200 per ounce till the June 5th deadline for Greece to make debt payments to IMF (a key catalyst).

As per my call last week, GCC markets broke first levels of support with the Dubai Financial Market (DFM) breaching the 4K level (AED terms), Saudi failing to continue its upward momentum. This week though markets look more resilient on Saudi opening mid-month via passive flows and I expect them to be range-bound with no major catalyst and Egypt to looking equally sedate.

While I expect Naira to fare in the median in the pool of African currencies, I expect the Rand to continue its slide on continued Dollar strengthening. This is hurting the JALSH Index akin to other emerging market indices.

“Ooh-bi-doo, I wan’na be like you
I want to walk like you, talk like you, too
You see it’s true, an ape like me
Can learn to be like you, too”

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.


Winner Winner Chicken Dinner (Market Wrap- May 24th)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa 

'You're not taking this seriously, are you?

Author: Tanya Rawat

“Winner Winner Chicken Dinner”! The origin of the term lies in Las Vegas where a chicken dinner used to cost less than $2.00 and the usual bet at that time was $2.00, so when you won you had enough for the chicken dinner. Hence “Winner,winner, chicken dinner”! 

The week opens with a Risk-On mood as the S&P closed off a third consecutive week of gains, the VIX at year lows of 12.13, dollar regaining strength (Dollar Index at 96 levels), US 10Y Tsy at 2.20 levels after bottoming out last month at 1.80 and Gold falling by 1.40% to $1203 per ounce. While Yellen remains supportive of a 2015 rate hike, a June rate rise is nearly off the table.

This hawkish tone from her is bound to affect Turkey adversely as the past week has been negative for it,  as it braces for the upcoming Parliamentary elections in the first week of June. Additionally, Dollar strength is bound to exacerbate its hurt further. Month-to-date the index’s mood has been dictated by the strengthening of the Lira versus the Dollar.

Expect the GCC markets to be spooked by the suicide bombing in KSA and new found dollar strength (negatively affects real estate and tourism sectors).We expect some passive allocation to UAE and Qatar on the MSCI rebalancing happening on the 29th May. Another major event to watch for, is the KSA market opening on the 15th June with the QFI regulations out, an event every market participant would be watching out for.

Egypt is set to continue its euphoria of buying into the market on the back of cancelled Capital Gains Tax. In South Africa, it’s a busy week with quarter-on-quarter (q-o-q) GDP numbers, unemployment data and trade balance numbers in as the Rand teeters and totters in the 11.80-12 range. On 29th May, as Nigeria (Africa’s largest oil exporter) looks to welcome president-elect Muhammadu Buhari in office, the Naira and the stock index have firmed considerably reflecting their confidence in him.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.


The Whirling Dervish: Turkey’s Monetary Policy Tools


Author: Tanya Rawat

Post Lehman, Turkey considered it prudent to adopt a mix of macro-prudential measures (MPM) as a supplementary objective to support price stability rather than outright capital controls with the intent of keeping domestic demand in tandem with the external demand. The measures have enabled Turkey to weaken the link between capital flow cycle and external imbalances without directly imposing capital controls which they deem hard to implement and easy to circumvent.

In the traditional inflation-targeting framework, central banks mainly aim at keeping inflation in line with the target by using a single policy instrument of short-term interest rates. However, in the new policy approach due to the tradeoff that may occasionally arise between financial stability and price stability, additional tools are needed besides policy rate. As a result CBRT diversified its policy tools before adopting the new policy mix.

The tools:

The Interest Rate Corridor – Similar to the discount rate in the U.S., which is one of their tools to control money supply, this is used to manage exchange rate and credit growth volatility induced by capital flows. The upper rate/‘ceiling’ is the rate at which CBRT lends to the banks and is meant for domestic borrowers. The lower rate/‘floor’ is meant for foreign investors. Banks that wish to borrow from the CBRT aren’t told in advance what rate they will be offered. The width of the ‘corridor’ indirectly helps determine this. In this structure, the width of the interest rate corridor determines the range of overnight interest rates that can be set by the CBRT. In other words, the width signals the maximum possible change that can be engineered in the short-term market rates via daily liquidity operations. Thus by managing liquidity through daily operations, the CBRT is able to smooth asymmetric outflows and erratic movements in the exchange rates. At times of high capital inflows, to ensure a ‘soft landing’, the ‘corridor’ is widened downwards by lowering the floor to reduce the attractiveness of short-term carry trade without creating excessive credit growth. When there is a threat of an outflow, it is narrowed by mostly increasing the floor rate and/or increasing the upper rate concurrently or independently, thereby effectively smoothing the weighted average funding to a higher end. If there is a threat of inflation, raise the ceiling rate thereby widening the ‘corridor’ to a higher end.

One-week repo – Under the current structure, as the CBRT provides funding mainly through weekly repo transactions, this is the ‘policy rate’.

Required Option Mechanism (ROM)– Allows the banks to voluntarily hold a certain fraction of their Turkish Lira reserve requirements in FX and/or Gold and thereby acts as an automatic stabilizer. Additionally, the Reserve Option Coefficient (ROC) is an increasing function of the usage of this facility.

Weighted average funding – Turkish banks’ borrowing costs as measured by their outstanding debt to the national lender and includes including one-week repo auctions, overnight loans, and as of Jan. 21, the extraordinary day rate.

Consistent funding rate – This was introduced in December 2013 as a reference to the one-week repo rate and O/N lending rate.

Late Liquidity window – Akin to the U.S. Federal Reserve’s emergency window, CBRT charges Turkish banks a premium over the O/N Lending rate and near 0% deposit rates just before markets close.

Extraordinary day rate – This was introduced recently in January 2014 meeting; the 9% rate will be applied to all borrowers when CBRT declares daily additional monetary tightening and withholds one-week repo auctions to squeeze liquidity. Yet another indirect methodology to a rate hike whose effectiveness hinges on the frequency of extraordinary days–subject to CBRT clarification.

Turkey continues to seek the right mélange of tools, much like the followers of the Mevlevi order practicing dhikr.


Akçelik, Y., Başçı, E., Ermişoğlu, E., Oduncu, A., 2013. The Turkish Approach to Capital Flow Volatility, TCMB Working Paper, No. 13/06

Alper, K., Kara, H., Yorukoglu, M., 2012. Reserve Options Mechanism. TCMB Economic Notes.

Alper, K., Kara, H., Yorukoglu, M., 2013. Alternative Tools to Manage Capital Flow Volatility. TCMB Working Paper, No. 13/31

Kara, A.H., 2012. Monetary Policy in Turkey After the Global Crisis, TCMB Working Paper, No. 12/17

Kara H., 2013. Note prepared for the BIS Meeting of Central Bank Chief Economists, Basel.

© 2012-2014 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© AP Photography.

An Indian Rhapsody

Europe is scrambling to keep the Euro together and the United States is readying itself for a tight electoral race, come November 6, 2012. Both continents have flushed their economies with cheap money to circumvent unemployment that remains stubbornly high and invigorate growth that remains minimal. The low yields offered by sovereign credit of the developed markets have urged investors to look to alternatives. Discounting for high-yield assets offered by a few European countries (with equally high default risks), the BRICs equation throws some interesting alternatives.

India recently had its sovereign credit outlook recently downgraded to negative from stable by Standard and Poor’s.  The reasons – an inhospitable investment environment made cumbersome by sketchy oscillating policy makers, gridlock in domestic politics, a burgeoning budget deficit, a weak Rupee and, incumbently entrenched corruption. Neither, highly publicized cases involving disgruntled foreign investors nor internal feuds in the ruling governance; the United Progressive Alliance has added positively to India’s investor haven image. It’s GDP, once galloping fervently, has weakened to a mere 5%.

Yet, the world’s largest democracy is still looking lucrative. Assuming Prime Minister Manmohan Singh’s recent blitzkrieg of reforms as outliers, let’s appraise India on its inherent indicators by assessing latest available statistics (courtesy: World Bank).

The primary school starting age in India is 6 years old in contrast to China’s 7 years old and the completion rate stands at 95% for both boys and girls. The secondary school starting age in India is 11 years old in comparison to China’s 12 years old. Public spending on education has historically been high at 3% of GDP in comparison to China’s 1.9% and 2% in Turkey. Despite its huge population, equity in distribution of income is a prominent theme in India with income held by the lowest 20% strata of the population at 8.64% in comparison to 5% in China, 2.85% in Brazil, 6.45% Russia and 5.7% in Turkey. With the largest contingent of a population residing outside their native country, Non-Resident Indians repatriate US$ 54 trillion i.e. 3% of GDP in stark contrast to non-residents of Brazil at US$ 3 trillion i.e. 0.18% of their GDP, Russia at US$ 5 trillion i.e. 0.35% of GDP, China at US $52 trillion i.e. 0.89% of GDP and Turkey at 0.11% of GDP. Thus, its historic lows of INR 56 per one US$ has in fact encouraged a sharp increase in the rate of repatriation, thereby unclogging any funding gaps faced by India in the form of lower Foreign Direct Investment (FDI). Indeed, a weaker Rupee exacerbates the current account deficit by effectively making imports expensive and thereby stoking inflation that currently is stubborn at a rate of 7.7%. However, India’s deficit isn’t as heavily dependent on foreign capital leaving less room for foreign exchange risk as seen during the South East Asian crisis of the 1990s where a flight of capital had dire repercussions with the manic widening of the current account trade gap.

However, a self-sufficient behemoth, India has one of the highest savings rate with gross savings at 33% of GDP in comparison to 17% of GDP in Brazil and 24% of GDP in Russia. The market capitalization of its listed companies comprise 54% of GDP in variance to 49% of GDP in Brazil, 46% in China, 42% of GDP in Russia, and a mere 26% of GDP in Turkey as traditionally, India has always been lead by Adam Smith’s Invisible Hand with ‘India Inc.’ always steering the juggernaut forth.

Friedrich Wilhelm Christian Karl Ferdinand Freiherr von Humboldt, a Prussian philosopher and founder of the University of Berlin said of the Bhagavad Gita “the most beautiful, perhaps the only true philosophical song existing in any known tongue”. In ‘The Argumentative Indian’ Amartya Sen succinctly highlights the message embedded in the sacred text, that of “faring well” and not just “forward”.

India is indeed embodying the message well.


Nair R., 2012. Moody’s says India sovereign ratings ‘stable’. Live mint & The Wall Street Journal, [online] 26 September. Available at: <> [Accessed 29 September 2012]

Jabri P., 2012. India government preparing new reforms. Business Recorder, [online] 27 September. Available at: <> [Accessed 1 October 2012]

Leaders, 2012. At Last. Economist, [online] 22 September. Available at: <>

© 2012 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© Christine Muraton Photography

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