Inflation, negative real interest rate and BIST… Due to high inflation and low interest rates, investors turn to the stock market in search of returns. At the end of March, the CPI exceeding 61% and the negative real interest rate of almost 50% by the CBRT, which did not change the interest rates, which was 115%, directed domestic investors to the stock market. The fight against inflation seems to have largely moved from monetary policy instruments to fiscal policy and liraization strategy, so we expect interest rates to remain low in TRY terms. The trend in global prices, the economic model approaches that destabilize inflation expectations and the 115% PPI also show the risks to our inflation in the upcoming period. This may cause the negative real interest position of the TRY to deepen. Since there are no foreign investors, the direction is given by the domestic investor.
BIST 100, inflation, policy rate, real interest rate comparison… Source: Bloomberg
High balance sheet expectations of companies in the inflation environment… Banks' first quarter balance sheets are expected to be very strong. Accordingly, the performance of the stock market is also positively affected... The current discount situation displayed by the market multipliers shows that banking stocks are also cheaper than the foreign markets. Therefore, the positive situation can continue with the support of good balance sheets. A historical profit announcement is expected in BIST 30 shares, especially in the banking sector. Banks trading at a high discount compared to similar companies are the main dynamics of the rise. While the banks, which are funded cheaply at 14% with the CBRT interest rate, increase the profit potential from core banking activities by giving loans over 25%, the CPI-indexed bond returns also have a catalytic effect on the increasing profit rates in a high inflation environment.
Inflation can also differentiate companies that can reflect rising costs on product prices, manage supply/supply problems, and create a risk strategy with market diversification against foreign demand risks. Ongoing supply problems, production costs and pandemic woes have prompted many companies to diversify their strategy and manage operational and financial risks well. Oil, natural gas and food prices, which have increased significantly with the Russia-Ukraine war, will force companies in this cost/price management and will lead them to inflationary pricing.
Macroeconomic analysis… Increasing energy and food prices are pushing the Turkish economy in terms of inflation and current account balance. When the economic and geopolitical effects of the war that broke out between Russia and Ukraine are taken into account, direct and indirect inflationary effects on oil, natural gas and food prices will also form the basis for price fluctuations in the coming months. Supply shortages originating from Russia may also be in question in this period, because if Europe extends the sanctions against Russia to the extent of stopping direct oil and natural gas purchases, a supply gap that is difficult to replace will occur. As an important importer, we consider the energy deficit and the increase in commodity prices negatively for our economy. This situation will both cause prices to rise and slow down the European economies due to the input deficit, and may suppress Turkey's export revenues. Turkey has important commercial relations with Russia, Ukraine and the European Union.
Turkey meets 41% of its refined oil needs from Russia. Turkey imports approximately 45-50 bcm of natural gas per year. 31.33% of total LNG imports come from the USA, Algeria, Nigeria, Qatar and many other countries as spot deliveries. Turkey has long-term take-or-pay agreements for natural gas transported through pipelines from Russia, Iran and Azerbaijan. In 2020, it is seen that Russia has a 33.59%, Iran 11.06% and Azerbaijan a 24% share in natural gas imports and the remaining natural gas comes from LNG imports. Some of these long-term take-or-pay deals will expire in the coming years and Turkey is expected to import more spot LNG.
Russia and Ukraine have a total share of 15% in Turkey's food imports. While 77% of wheat imports come from Russia and Ukraine, these two countries have a share of 59% in our corn imports. In other words, these two countries have a direct effect on grain products. The total share of Russia and Ukraine in our soybean imports is 26%, while it is 45% in sunflower. The negative impact of the supply coming from these two countries will have an increasing effect on food prices in the country.
In terms of tourism, we are in a good position in terms of airport traffic, which has increased after the pandemic recovery under normal conditions, and we will receive a positive income contribution after the April-May period. However, geopolitical risks will negatively affect tourism originating from Russia and Ukraine, limiting the potential from these countries. Both Russia and Ukraine have their economies damaged by the war, so per capita spending could be adversely affected as well as the number of people. Mobility from these countries may also decrease due to conflict and sanctions. In 2021, tourism originating from Russia and Ukraine has a share of 27% in our total tourism on the basis of number of visitors.
We expect these factors to both keep inflation high and increase the current account deficit close to 50 billion dollars on an annual basis.
Buyback programs… The fact that some companies have started share buyback programs by announcing that their share prices have been traded at a discount for a long time causes the withdrawals in the stock market to be limited.
MSCI indices, Russia, global portfolio movements… There is a need for some developments that can be viewed positively from a macro perspective and that can be the subject of portfolio entry, at the point of increasing the foreign exchange rate, which has decreased to 36% in the stock market. The removal of Russia from the MSCI indices and the increase in Turkey's weights, plus the possible inflow of funds that will not be directed to Russia due to the sanctions, may be positive. At the same time, Turkey, which has made efforts for peace by following a good balance policy in the Russia-Ukraine war, has created an opportunity to develop good interstate relations since its strategic importance is understood for the US and the EU. However, portfolio movements that the Fed's rate hikes may create against developing countries may have an adverse effect on Turkey due to the very deep negative real interest rate.
Conclusion? The New Economic Model, which was started to be implemented, directed the investor to the Stock Exchange. On the basis of this, despite the inflation over 60%, the fact that the real interest rate offered by Turkey was close to minus 50%, and this led the investors to seek real returns. Due to high inflation and low interest rates, investors turn to the stock market in search of returns. Since there is no foreign investor, the direction is given by the domestic investor. With the effect of the Russia-Ukraine crisis, the government renewed bilateral relations by meeting with the leaders of many countries. In addition, the possibility of using the funds from Russia to enter Turkey in the future has been bought to a certain extent. Balance sheets, on the other hand, are expected to be announced positively for the 1Q22 period, especially for banks, pointing to high profit growth. Such factors explain Borsa İstanbul's recent high performance in lira terms despite the negative global risk appetite.
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