Having appeared to have passed the worst of the economic crisis, Turkey has faced a fresh bout of turbulence in recent weeks. We have revisited our framework for identifying buying opportunities following an EM crisis to gauge Turkey’s position on the recovery path.
Equity bottoms typically occur when M1 money contracts, excess liquidity (defined as real money growth less industrial production growth) collapses, FX reserves stabilise following a drawdown, and policy rates are slashed. The picture in Turkey is mixed. M1 money is still expanding in the double digits, while policy rates have been successively tightened (moreover, the implied overnight rate shot up to over 1000% on March 27 as lira funds were withheld from ‘speculators’). Excess liquidity previously collapsed and has subsequently recovered, while FX reserves appear to have bottomed, despite the most recent drawdown.
These mixed signals suggest investors may need to wait a little while longer before jumping on the recovery trade. Buying Turkish assets prematurely before the foundations of recovery have been established would expose investors to elevated volatility.
(Click on image to enlarge.)
Source: Bloomberg, Macrobond and Variant Perception