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Yapı Kredi Invest Strategy:   Summer is Coming

Our theoretical short term model signals are bullish (100% long) Turkish equities and bearish (20% short SP500 futures) while flat for Gold and USD/TRY currently

Yapı Kredi Invest Strategy:   Summer is Coming

“In the depth of winter, I finally learned that within me there lay an invincible summer.” ― Albert Camus

  • Markets were pessimistic back in October. Things have changed: Turkish assets have performed extremely well and most major equity markets have risen after our contrarian piece (“Macro Thoughts – Turning more Positive, 15 October”) was published. Now it’s almost impossible to find a nonbeliever or a bear!
  • The current global economic environment remains in Quad3 (slower growth/lower inflation), but the latest PMI reports on global manufacturing were a mixed bag but genrally point to a rebound in growth. Specifically, manufacturing new orders appear to have troughed and with potential for decreasing uncertainties on trade tensions and Brexit- likely to boost corporate confidence which has been lagging consumer confidence- a cyclical rebound in growth and inflation due to lagged effects of oil and base effects looks likely.
  • Thus, the global economic environment is likely to enter Summer/Quad1 (higher growth/higher inflation). This is a probability very few (especially bonds) seem to be ready and positioned for. If true, the quad change will have major implications for various asset prices.
  • Last month we downgraded our tactical stance for global risk assets to neutral while keeping our tactical view on Turkish assets as neutral. Our theoretical short term model signals are bullish (100% long) Turkish equities and bearish (20% short SP500 futures) while flat for Gold and USD/TRY currently.
  • We maintain our neutral strategic stance across Turkish assets as well as global risk markets (both since March 2019). Gold remains our favorite investment asset since the start of the year.
  • There are increasing signs that central banks around the globe are switching to a less activist but more symmetric reaction function with increasing tolerance towards higher inflation rates. For example, the Fed’s hurdle for interest rate cuts is high however, the hurdles for hiking seem to have become even greater.
  • Similar to the Fed, the ECB’s strategic review, which will be initiated in January, should lead to a more symmetrical reaction function.
  • The combination of increasing growth and a continued loose monetary policy should lead to higher inflation expectations, rising bond yields and a steeper yield curve. The growth backdrop for equity markets should remain friendly in 1Q but with probably increasing volatility and differentiation.
  • Thus, cyclical sectors may be preferred to those low yield proxies. On a regional basis, EM should outperform DM.

 

By Chief Strategist Murat Berk and analyst Yesim Sarisen

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