- The market’s collective consciousness is likely to concentrate on the stag part of stagflation in the coming days. While the inflation part has become common knowledge by now, the growth slowdown is not. But we expect this to change as new data comes in.
- The market’s collective consciousness will probably also come to the realization that the famous Fed put is gone or at least the strike price is much lower.
- His views may or may not be completely representative of the Fed but ex New York Fed’s chief Dudley’s views are not irrelevant. Thus, his recent article should be an eye opener to those who think the Fed will come to the rescue after a garden variety correction.
- Our view remains that it will take a much bigger sell off for the Fed to throw in the towel. And such sell off is what we continue to expect.
- Less stimulative monetary and fiscal policy, high valuations, too optimistic appearing EPS expectations and a Fed that seems intent on tightening financial conditions are not a bullish combination.
- We continue to view DM equities as in a longer term topping process and expect to see lower prices into the summer months. Using the S&P500 index as our benchmark for global risk appetite, we expect to see sub 4000 levels in the next two quarters. We said last month that our tactical view is no longer positive as the risk reward for bullish risk asset positions has deteriorated and as we expect 4600 to cap this counter trend move.
- Our conviction remains for inflation assets, especially precious metals, as well as EM over DM and value over growth. Our favorite sector remains mining.
- In line with our views, Turkish equities have performed relatively well and we continue to expect this to continue. The early stages of a high and rising inflationary macro environment amid negative real interest rates, are generally accompanied by still robust growth. At this stage you should favor equities over fixed income. And this cycle has not been an exception. The bad news is that this is hardly sustainable and generally turns stagflationary, where equities and fixed income decline simultaneously.
- Our Model Portfolio for Turkish equities is below
By Murat Berk, Chief Strategist of Yapi Kredi Invest
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