Global: The “Goldilocks” period is set to end
We see a higher-than-usual probability of the global economy losing significant momentum, with the EU and US tipping into recession in 2024. While the current investment landscape remains of the “Goldilocks” variety, we think the upside is limited globally for risky assets given already high multiples, even under a soft landing scenario. We expect the central banks’ rapid hiking, coupled with less help from the fiscal side and looser labor markets, to likely pressure global growth more in 2024. The EU and the US are likely to enter a hard or shallow recession. We consider the former to be more likely. Global risk assets, especially US equities that have been on the rise since Nov’23, could peak in January and decline significantly in 1H24.
Emerging Markets have better prospects
We think the risk-reward for emerging markets is more favorable than developed counterparts. We favor precious metals, especially gold, among our favorite asset classes, as peak Fed hawkishness is now behind us, and real rates should continue to decline, historically a bullish setup for gold. For commodities, we expect the anticipated recession to weigh down on demand, although Copper could deviate positively, especially in 2H24.
Türkiye: We have a cautiously positive outlook for the BIST
The BIST yielded a 36% return in TL terms but a 14% loss in USD terms in 2023. The key macro factor set to determine its outlook in 2024 is the effectiveness and duration of the new economic team’s disinflation process. Once the lagged effects of the interest rate hikes and tighter financial conditions on economic activity surface more clearly, the CBRT’s stance will be decisive.
In our base case, we assume the CBRT will continue its policy normalization and data driven stance before and after the municipal elections in Mar’24. Such behavior would attract foreign investors, probably to bonds initially and later stocks, in line with growing confidence in the sustainability of fixing macro imbalances and improving FX reserves.
Additionally, with its highly rate-sensitive economy and foreign funding needs, we foresee Türkiye ranking among the prime beneficiaries of the FED’s rate cut initiation in 2024. Any positive outcome from EU Custom Union talks would also be supportive, at least sentiment-wise. Accordingly, while we are uncomfortable with companies’ weak near-term earnings and cash flow outlook due to the rising cost of funding and weaker demand both at home and abroad, we remain cautiously positive for the BIST at current levels.
Our bottom-up 12M index target at ~11.5K offers 43% upside in TL terms and roughly flat in USD terms based on our year-end inflation assumption of 40% and USD/TL (eop) of 42.
What we like?
We broadly preserve our defensive stance and still prioritize those stocks well-equipped for high inflation (e.g., pricing power, high gross margin), capable of preserving their cash stream in a high-interest rate environment (e.g., low indebtedness, low NWC needs), and with the potential to capture higher foreign interest based upon size and liquidity.
Our Model Portfolio comprises AKBNK, TSKB, BIMAS, THYAO, SOKM, AGHOL, AKGRT, AKSEN (new), MAVI (new) ve TTKOM (new). We are overweight on Banks given their higher sensitivity to Türkiye’s declining risk premiums and potential to catch up with the Industrials after years of underperformance.
Any failure in capturing foreign inflow, early initiation of rate cuts, inertia in inflation expectations, low accumulation of FX reserves, lackluster earnings, and margin outlook on weaker economic activity, including exports.
The hot topic: Inflation accounting (IAS 29) Don’t worry, just accept it
IAS29 adjustment is ultimately an accounting restatement aimed at reducing the adverse impact of hyperinflation on historical accounting numbers, unlike Tax-code-based inflation adjustment, which would directly impact tax payables. Neither model yields a perfect solution, but at least represents a useful effort to allow better assessment of a company’s future value drivers based on key accounting-based metrics (e.g., gross margin, ‘ROE – COE’ or ‘ROIC – WACC’ spread). Post-IAS 29, we foresee the most pronounced changes in the financials of those names whose accounting-based margins and returns have hit historical highs over the past couple of years.
By Yapi Kredi Investment strategy team
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