Turkey: A more uncertain outlook

Both manufacturing PMI lead indicators and consensus forecasts point to a protracted slowdown in growth of overall economic activity in Turkey. Moreover, we expect political jostling within a coalition government (or a struggling minority AKP administration) to frustrate the progress of Turkey's much needed structural reforms to rekindle GDP growth, says Credit Suisse

Moreover, unemployment north of 11% has revisited levels unseen since the tail end of the global financial crisis, although the level is very seasonal in nature and the 3-month forward lead indicator is pointing towards the last February print being an inflexion point with a near-term improvement in employment over the summer months.

The central bank loans tendency survey indicates healthy mid-cycle levels (25% y/y) of bank asset growth in 12 months' time but a loan to deposit ratio approaching 120% will act as a natural brake on credit growth as banks increasingly struggle with funding.

The market consensus 12-month forward earnings multiple (9.5x) appears to be appropriately discounting the latest central bank's survey of 12-month forward inflation expectations (6.9%). However, the risk is that inflation expectations now start to climb as the beneficial base effect from the drop in the oil price (a 10% fall in oil price is consistent with a 3% erosion of the energy component of Turkey CPI inflation) begins to dissipate.

Credit Suisse says, "Having held out on Turkish equities (15% overweight) in 2015, we believe that in the post-election investment climate it is now prudent to reduce our exposure to a benchmark weighting. We attribute the year-to-date underperformance of Turkey's equity market to (i) justifiable political uncertainties and (ii) dollar strength."