After a very difficult and exhausting year, I will try to write down the expectations for 2023, with the same discipline, by making an accounting of the last year before starting a new year. I will take care to make the language of my report, which I wrote every day at 4:45 in the morning and which touches so many people I do not know, plain, simple and understandable as much as possible. In the last corner of the year, I had the opportunity to invest a little mind. In this respect, I will try to focus on the big picture without a magic ball in front of me, by addressing some issues that I did not have the opportunity to include in my daily market comments on the expectations of 2023. In the meantime, I should note with peace of mind that while the previous year is searched more and more each year, the dimension of uncertainty in the world has started to increase in the same parallel!
We’re drifting after uncertainty
As you can appreciate, we have always been dragged after uncertainty in recent years. Covid has plagued us; At first we didn’t understand what was going on. Then war broke out, and we do not know where it will lead. Then the ‘nationalism’ movement started on the commodity front, followed by the supply crisis chain that we all experience in daily life. In the post-Covid era, global central banks switched to ultra-loose monetary policy, rapidly resetting interest rates in order to keep people ‘long live’ and businesses ‘standing’, and opened the (money) gates to the fullest.
As you can imagine, when liquidity was channeled to the capital markets instead of the real sector, global financial markets, which completed 2021 with great enthusiasm in parallel with the morphine intoxication experienced, faced two different shocks in 2022 and almost settled down. Contrary to the positive pricing that will be brought by the normalization that is expected to begin with people ‘re’ taking to the streets after the ‘easy money’ period, on the one hand, the inflation, which started with the principle that every drug has a side effect, started to hurt. We are faced with a new era. In addition to the price increase in energy products, where the negative weather hit the hardest, the supply chain problems that could not be recovered with China’s (zero covid) zero-case policy and the related supply-side cost inflation shaped the main theme of 2022. Subsequently, even though it was too late for demand-driven inflation, the central banks abruptly turned off the music and ended the party mood of 2021, while interest rates rose to 40-year highs in many parts of the world, while stocks and cryptocurrencies were almost destroyed under the leadership of technology, which rose in the era of abundant money. . With a more accurate approach, it caused losses in a significant portion of asset groups excluding energy during the period of high inflation.
As I mentioned above, starting from the assumption that every drug has a side effect, the side effect of the tight monetary policy brought about by rapidly increasing interest rates this time paved the way for a sharp cooling in economic activity, and considering that the worst in inflation in 2022 is left behind, the main theme of 2023 will be the main theme of 2023. We worry that recession concerns (not growing) will shape it. I would like to note that this scenario, namely the hard landing of the aircraft, is in the last place in the preference order of the markets.
Together, we will monitor the captaincy skills of the leading central banks between inflation and growth or in these dangerous waters and the result they will achieve in parallel. I wonder if the cost of living will continue despite the inflation that will decrease almost everywhere in the world due to the erosion of the purchasing power of the incomes that do not increase as much as the inflation and the associated base effect, as well as the continuation of the tight financial conditions, as well as the recession that will be experienced due to the interruption of economic growth and the resulting recession in 2022. We will follow with concern what kind of ‘balance’ the layoffs that started in the second half of ‘ will transfer to 2023. We will watch with interest whether the FED, which is advancing in interest rates, so to speak, by spoonfuls, quickly withdraws from the positions it won with a possible debt crisis and will give back what the markets want with the ladle. As you know, whenever we say that this FED is another FED, we are faced with the ‘printing house’ FED that we know ‘at one point’. I hope 2023 will not be a debt crisis triggered by the black swan layoffs and revolted by the recession!
super cycle of the dollar
Mankind, fighting an ‘invisible’ enemy in 2020 and 2021, encountered a ‘black swan’ at the beginning of 2022. While the cards were redistributed in the world arena with the Russian invasion of Ukraine, in addition to the panic atmosphere experienced, the markets quickly went into risk-off mode and took refuge in the safe harbor, namely the dollar, with the FED saying that inflation is temporary and darkening its eyes in order to regain its lost credibility by being late. If the Martians invaded the world, putting aside printing money, which is the only recipe it knows, the FED broke its silence for about 2 years in March 2022 and increased the policy rate from 0.125 percent to 4,375% by increasing it seven times in a row. Then, inspired by the movie La Casa De Papel, the FED, which flooded the markets with money and loosened its balance sheet more than doubled (quantitatively) in almost 2 years (QE) to the edge of 9 trillion dollars, started to tighten (QT – quantitative) in the second half of 2022, albeit with baby steps. tigtening) started to withdraw liquidity gradually.
Global financial markets, which have been addicted to morphine (cheap money) for years, this time left a wreck behind them, quickly leaving the stock and crypto money markets they attacked, out of the magic of the vast liquidity that entered the system during the pandemic period and the almost non-existent interest rates. With the abrupt cessation of dosage, stocks left an exceptionally pessimistic year behind, in a mood mixed with fears of inflation, war, and later recession.
The US Nasdaq index, where technology stocks are traded, lost a third of its value in 2022. Tesla witnessed irrational price behavior with plenty of money in 1 calendar year (in 2020 and 2021), and after gaining 700% (seven hundred) and 50%, respectively, it decreased by 70% in 2022. Tesla’s market capitalization fell rapidly from $1.1 trillion in January 2022 to $0.4 trillion!
Under Prime Minister Truss, who resigned in the midst of a financial and political crisis after 50 days in office, the royal lion sterling, after testing the all-time low (~ 1.03) against the dollar, was resigned. normalized with his return to orthodox monetary policy. The common currency of Europe, the EUR, was stuck between the energy crisis after Putin closed the gas valve and the super cycle of the dollar, dropping below the ‘parity’ level and falling to the bottom of the last 20 years by testing the levels of 0.95.
When Japan went in a different direction to Mersin as the world was going, Yen fell to the most worthless level of the last 32 years against the dollar. Subsequently, the expectation that the FED will take its foot off the gas pedal after inflation, which shows signs of cooling in the USA, gained strength, and when the Bank of Japan, which took the step of normalization in the last days of the year, updated the ceiling target for 10-year bonds from 0.25% to 0.50%. This step brought some relief to the crawling Yen.
While the 10-year bond yields of the USA, which was seen as the world’s risk-free interest rate during the pandemic period, dropped to 0.5%, returning to 2008 (4.3%), the year of the global crisis, after seeing the lowest level in 150 years, the crowds in 2017 and 2021 Bitcoin, the currency of the resistance, which was the scene of his madness, erased 80% of its value in a one-year time frame with the FED showing its teeth.
In April 2020, when everyone closed at home and the need for oil decreased or the supply was greater than the demand, WTI oil futures contracted (minus) after falling to (minus) $ 40, with the outbreak of the Ukraine crisis, it rose to the highest level of the last 14 years. If we speak in the language of numbers, the price of Brent per barrel of north sea oil has reached the level of $ 140 with the outbreak of war in March 2022, after the price of the barrel stretched to $ 16 during the covid period. When Europe’s growth engine, Germany’s dependence on Russian gas, was 65%, Europe’s benchmark gas prices (TTF) took a significant place in our bulletins for most of the year, with Putin’s use of his energy card and closing the valve. In a simpler approach, gas prices in Europe rose to the level of 340 EUR/MWh at the end of summer, with the approach of the winter months, increasing more than 60 times (in a 25-month period) compared to the covid period, in a large part of the world, “How much did your electricity bill come in? ” It also caused the question to be asked!
After Russia, the world’s granary, entered Ukraine, the bushel price of wheat rose to an all-time high by rising to 1,425 cents. The ounce price of gold, which is inversely correlated with the dollar return, once again tested the all-time high of $ 2,070 before the FED pulled the trigger, and after it spent most of the year with its investors, it normalized and finished the year by recovering to the level of $ 1,800, just like other investment instruments. . The ounce price of silver, which is more sensitive to risk appetite, completed the year at the starting point without showing any significant change. In the new year, we will be a close follower of coffee, which completed 2022 at the bottom of the league in the yield class.
The world is out of balance
Just sit back and think about what kind of year we spent… We cannot claim that the global economic order is trouble-free, but we are well aware that the frequency of crises is getting more and more frequent. We think that the main reason behind this is the imbalances in production, consumption, trade and distribution. For example, to give an example from my distribution, we know that the wealth of almost a handful of people in the world is equal to the wealth of about half of the world’s population. On the other hand, are you aware that in the USA, the Gini coefficient deteriorated further in 2011, based on the 0.50 level (the closer the Gini coefficient to 0 indicates equality in income distribution, the closer to 1 indicates the deterioration in income distribution)? For example, in Turkey, my consumption is very lively, but the current account deficit problem is always on the agenda because the production is not strong enough.
For example, as a footnote, the share of the world population aged 65 and over is expected to increase from 10% in 2022 to 16% in 2050. Think about how this change will create a change in the field of health.
On the trade front, customs barriers began to appear in parallel with China’s strengthening in every ‘area’, and global trade began to slow down. This inevitably caused other well-known issues to come to the surface: The current debt in the world is more than 300 trillion dollars, or simply 3.5 times the total annual production of the world! How will this debt be paid? There is only one answer to that these days. That’s inflation. I believe that the central banks, especially the FED, have been successful to a certain extent in their fight against inflation and we think that we are nearing the end of interest rate hikes. The brake will be pressed first, and soon it will come to a stop. We think that the risk of inflation has decreased. As we tried to explain above, commodity prices go down rapidly, while freight costs decrease. Although it is misleading, it should not be forgotten that the base effect is also in favor.
The world goes to Mersin
After a quick look at the world, let’s turn a little – considering we are in the TL region – to Turkey. In the world, when excessive expansionary monetary policies caused inflation problems, authorities turned to orthodox monetary policies and tended to increase interest rates, while Turkey preferred high growth over the ‘New Economic Policy’ model on the electoral surface instead of fighting inflation. However, when the side effects of these policies started, the brake and the accelerator pedal were pressed at the same time: While the interest rates were falling rapidly, it became more difficult to reach the credit. As they say, the most expensive loan is a non-loan. According to BRSA data, the loan-to-deposit ratio decreased from 100% at the beginning of 2021 to below 85%. If the inflation in the TRNC, which exceeded 120% and went back to 1995, is ignored, Argentina rose to the top in the inflation league, while the Central Bank of Argentina increased its interest rates by 3700 basis points to 75% in the last 1.5 years. Turkey, which is the closest follower in terms of inflation, cut the interest rate by 1000 basis points and brought the interest rate to ‘single digits’. Turkey, which deviates from the orthodox (known) monetary policy with the desire to show the economy strong, like every power that goes to elections, Mr. With the words of Minister Nebati, he talked about the interest cuts, the Chinese model and the current account surplus, with the expressions “Heterodox approach that represents an epistemological break from the neo-classical economic thought…” Parallel to these developments, the USDTRY rate increased so suddenly and with panic that, when it rose from 8 Lira to 18 Lira in 3 months, it was admirably reinvented (DÇM – Convertible Deposit Experienced in 1968) or with the new name Currency Exchange. The Protected Deposit (KKM) product succeeded in relieving the patient’s pain to some extent. Although the morphine given to the patient, which is a metaphor I use a lot, worked at first, the body that got used to morphine afterwards put the patient in a strange mood. Although its attractiveness has decreased recently, it must be admitted that the KKM has brought some stability to the exchange rate front. However, the question to be asked is what will happen when the doctor stops injecting morphine into the patient! We will see this over time.
The period of tying money to ‘property’
Let’s go back to inflation. Turkish people, who have a great experience in the face of inflation, knew that tomorrow would be more expensive than today in inflationary periods, so they pushed the demand early and tied the money to ‘goods’. When everyone wanted to connect good money to goods, and production was thought to be weak, imports increased and this brought the exchange rate up again. We also know that the only instrument by which Turkish people with relatively weak financial literacy measure whether the economy is doing well is the exchange rate. In other words, if the exchange rate is calm or falling, the economy is good, if it is rising, things are not going well. It’s that simple! Being aware of this, the authority constantly appeared in the foreign exchange market as the main ‘playmaker’ in 2022 in order to keep the exchange rate calm and to reinforce the impression that the economy is progressing on a good path. First he sold his own foreign currency, then borrowed (swap) created a kind of foreign currency and used it, and then he created ammunition for himself by including 40% of the export prices and the purchase price of the foreigner’s housing. We are almost certain that this strategy will continue until the June elections. It should be noted that while the CBRT’s (gross foreign exchange and gold) reserves have declined for most of the year, they have recently started to rise again and ended the year with a level of 130 billion dollars (the peak of the year). When we look at the net position of the CBRT excluding swaps, we cannot talk about a recovery to the same extent, even though there is an improvement. In the last 8 weeks, the real meltdown in foreign exchange deposit accounts reached approximately 23 billion dollars. We saw that the TL deposits of domestic residents increased while the DTH was declining.
It should be underlined that in parallel with these developments, we do not expect a ‘large-scale’ movement in the exchange rate until the election. Of course, foreign currency assets should also be able to do this in terms of ammunition, and the positive side of the war with Russia comes to the forefront for Turkey at this point. With the money brought by people from Russia and Ukraine to Turkey and even the TRNC with the war, or the trade has changed a bit due to the war, net errors and omissions in Turkey’s balance of payments statistics in recent years, that is, the money inflow of unknown origin (to the system) We see you breaking the record. To give a footnote, while the CBRT’s banknote FX stock gained momentum especially after May and reached almost 10 billion dollars, in the first 10 months of 2022, approximately 21 billion dollars of net errors and omissions managed to fund a large part of the current account deficit. We should not ignore the expenditure items of the oligarchs who came after the war instead of the so-called ‘lice’ tourists who come in a standard tourist season. Putting all these together, we understand how strong the CBRT’s hand is to keep the exchange rate at a certain level. I mentioned above that although the CBRT created a psychological relief by lowering the interest rates to 9%, TL loans did not increase at the same time. Parallel to the fact that the market rates did not decrease to the same extent against the decreasing policy interest rate, the authority stepped in again and took measures to issue bonds to the banks, and this time, despite the decreasing commercial loan interest rates, quantitative tightening was applied. We spent the year 2022 reading and understanding the communiqués published by the BRSA during the last business hour of the week.
Without deepening the issue at this point, it should be underlined that the manufacturing industry has shrunk for 8 consecutive months since March 2022, by looking at the leading indicator of growth, namely the PMI index of the manufacturing industry in Turkey. When credits contract despite the fall in interest rates, headings such as industrial production, capacity utilization, electricity consumption and even confidence indices confirm that there is a weakening in the economy. This means that a slowdown in the economy is actually a conscious choice. We understood more or less what the roadmap would look like until the election. How long will these policies continue? It is obvious that postponing the problems will pave the way for bigger problems. For example, as a banker, I cannot explain the single-digit bond interest rates (with the obligation to buy bonds brought to banks) in an environment where inflation has reached triple-digit levels, with economic fundamentals.
We know that commercial loan rates have declined sharply recently, while deposit rates have increased. As a banker, I can clearly say that loan interest rates are higher than deposit rates, except for exceptional periods. However, this picture has been seriously reversed in Turkey recently. In the last days of the year when we wrote our annual report, according to the latest data of the CBRT, the gap between the commercial loan interest rate and the TL deposit rate for up to 3 months widened to 9 points in favor of deposits. Although the transfer of some of the deposit costs to the government with KKM in 2022, the increase in the returns of the existing public debt securities in the inflation-indexed bank portfolios and the foreign exchange incomes written by the long positions in the foreign currency positions of the private banks, increased the bank profits, which is the main function of the sector. It should be noted that the deposit interest rate is extremely negative for the future profitability of the banking sector!
On the other hand, it should be underlined that the demand for real estate and housing prices have gone crazy in an inflationary environment. While the price of a 120m2 flat in Istanbul rose to 3.2 million TL (let’s not ignore the rent increases), the m2 price in Turkey rose to 16,563 TL on a median basis. Let’s remember that the price of a 120m2 flat in Istanbul in March 2020 is 626 thousand TL! In an inflationary environment, those with a lot of money bought houses, while those with less money literally lifted the stock market to the sky. Among the popular stocks, the price of Sasa has increased more than 25 times in the last 2 years, and Hektaş’s has increased almost 50 times. If we look at the market value book value ratio of these two stocks (ie how many times their balance sheet is traded), 16 times and 46 times, respectively! I can’t say that the stock market is expensive, especially in dollar terms, but it should be underlined that stock selection is also important.
2023: Magic Sphere
Let’s try to deal with the new year, which is very difficult to predict by looking at our (non-existent) magic sphere without boring our readers further. The most important agenda item in 2023 will be the elections to be held in June. While evaluating 2023 on the Turkish front, it is necessary to evaluate it in two different time periods, before and after the elections. Since there is no clear picture/signal before the election, we see the possibility of a big move in the financial markets before the election (we predict that the exchange rate will remain on the defensive side in a controlled way). It is useful to divide the table after the elections into two. If orthodox monetary policy, investor-friendly, rule of law is the basis, or if such popular policies are returned, we foresee that Turkey, whose potential and importance has increased in the world, can quickly normalize. In the axis of monetary policy, we think that the policy interest rate will be increased to 40% (shock antibiotic treatment) at first, and then, as conditions permit, the interest rates will be gradually reduced with normalization. In such a case, we predict that the USDTRY rate will close at 23.00 TL in 2023 (end of the period). If the continuation of epistemological policies is the basis instead of orthodox monetary policy, or if, as I mentioned above, Turkey’s potential is not brought to the fore or if it is adopted in the absence of foreign investors (a more closed economy), we will take the 30.00 TL level as a basis in our balance sheet studies on the exchange rate front. It should be noted that in the simplest form, the tone will not be gray after the selection. We think that CPI inflation will fall to the 35-40% band with the help of the base effect, prices will continue to increase, but the rate of increase will slow down.
If we leave the Turkish front and expand abroad a little more, the appreciation of the dollar will gradually fall behind, and the level of 1.10 in the EUR; In GBPUSD parity, we foresee the 1.28 level. It should be noted that in Turkey, the EURTRY rate will target 25.00 in a positive scenario and above 30.00 in a negative scenario, and the equivalents of these figures will be 30 and 38, respectively, for the GBPTRY rate. We expect the precious metals asset group, which has been adversely affected by interest rate hikes, to be at the forefront in 2023. For this reason, it should be noted that it will definitely be included in our portfolio preferences. We think that energy prices, especially natural gas, will decline, while base metals will remain relatively flat in the first half of the year. We will include fixed income securities on the basis of foreign currency (still corporate / bank bonds with yields in the 6-8% band) in defensive portfolios. For investors with a high risk perception, we will try to include technology stocks, which have witnessed huge losses in the last 1 year.
In the last corner of the year, the face of the global financial markets was positively affected, parallel to the Chinese authorities, who quickly moved away from the strict zero covid (zero case) application and took the step of relaxation. Of course, the reason behind this should be read as the increase in demand and the acceleration of global growth in parallel. Considering that China is the largest importer in the ore and metal market by itself, representing 1/3 of the world, the rapid reduction of covid measures should be read as positive news for the metal market. While the increase in risk appetite means that ships leave the safe harbor, of course, we should not forget the other side of the coin: In this context, although we raise our hats to growth hopes, we will not ignore the risk of growth creating inflation at the same time.
On the other hand, with Russia’s decision not to sell oil to countries that apply ceiling prices, the barrel of Brent crude oil rose again to $85 in the last days of the year. We find it useful to underline that the dynamics of the energy market may follow a very different course throughout the year, with the extremely cold weather affecting life negatively in the USA. We will closely monitor the barrel price of Brent oil, which we had the opportunity to trade within the year, in the band of 63-77 dollars.
big picture
When it comes to gold, silver, oil, bitcoin and dollar, it is necessary not to ignore the big picture that changes. We think that new production centers (with the principle of sustainability) will start to rise instead of China, with the supply crisis chain that the world experienced during the Covid period and the USA’s loss of position against China as a global superpower. If he plays his cards well, it should not be forgotten that Turkey has great potential at this point. It should not be overlooked that we are moving towards a more divided world after the Ukraine war, with the polarization of the USA and the EU against China and Russia, and the increase in geopolitical risks.
Climate crisis. We think that we will face the biggest disaster that awaits mankind in the coming years. We are worried that melting glaciers and rising sea waters will threaten coastal cities, drinking water and even agricultural areas, and that a food and water crisis will come within radar range. We will give more space to the agriculture sector and the stocks on this side in the new year. We think that the issue of green energy and ‘electrification’ will enter our lives more and more every day. In this context, electric vehicles (EV) and the EV sector will be within our radar range.
The crises in the world do not necessarily happen in the stock markets. One of the biggest crises of the recent past is the ”Great Resignation”. Difficulty in finding people to employ or quality employment stands as one of the biggest obstacles to growth and development. Among the resignations in the USA in 2021, 25% better work / private life balance did not escape our attention, according to the surveys. If Alex is Fenerbahce’s playmaker, human resources are your greatest playmaker! We believe that human resources should not be overlooked.
Hard Times
May the hard times never pass. Hard times are times of revolution. Hard times are the moment to molt. Hard times strengthen. Let’s appreciate the hard times. Even if there is no problem, let’s not forget that there is a big problem. Let’s be resilient, agile and flexible. Let’s not forget that flexible structures remain standing in an earthquake. Try and fail. Try again, get better wrong, but never give up. Remember that the greatest successes come from the luxury of making mistakes. You are an extraordinary asset with incredible opportunities for self-discovery. Don’t waste time, use your time to rise. Don’t be afraid to make mistakes either!
Have your excitement and hope in the new year. Enough money, but let’s wish health first. May there be no lack of love in your life 🙂
Hope to see you next time…