Instead of tracing what has happened since the first visible incidence of ‘Gulenist movement’ (as named by the AKP) and the two elections that took place last year, we would like to focus on what we believe are the key objectives/positions taken by the main player(s?) of the ruling party. We believe it is clear to the market (hopefully by now) that Turkey is an ‘autocratic democracy’ (an oxymoron): the government is elected through a democratic process with an aim to rule as an autocracy.
Irrespective of the ‘office’ held, Mr. Recep Tayyip Erdogan (currently in the office of a neutral President) wants to rule the country despite holding a ceremonial post. The power in Turkey officially rests in the office of Prime Ministership which is occupied by the leader of the ruling party (currently, Mr. Binali Yildirim).
It is an open secret that President Erdogan is trying to engineer amendments in the constitution to ‘upstream’ power to the presidency and rule the country. His actions so far indicate his desire to control and manage outcomes as he sees fit. This is in line with his interference via commentary on interest rates, prosecutorial activities, and strategy towards PKK and Kurdish elements in Turkey, involvement in Syria, etc.
Following the market turmoil primarily caused by the Brexit vote (i.e. leave winning), markets rebounded by and large driven by three 'forces' : 1) markets started to believe in the deferral of a US Fed rate hike for a good few quarters, 2) Chinese economic performance was not as bad as feared by the markets and 3) further QE across major financial hubs : a) monetary easing in the UK via a rate cut (anticipated post brexit – announced early August) and and QE (anticipated post Brexit, announced early August UK bond buying programme), b) further easing/expansionary strategy for Japan, c) potential extension of the bond buying programme by ECB, etc. IMF/World bank et al cut their global growth forecasts by 10-20bps for 2016 on the back of the Brexit vote which was ignored by the equity markets.
Contrary to common perception, based on real high frequency data and ‘changes’ that we observe, we believe 1) the economic outlook has changed for the better, 2) the legal infrastructure and reforms re financial sector, especially the NPL is in place, and 3) the banks are in advance stages of planning and implementing reduction of NPLs and restart core banking activities.
Instead of updating on the ‘news of the day/week/month’ and or commenting on how/why and what of the outcome of the Brexit vote, we want to focus on three aspects: 1) how it affects UK and what we believe might happen, 2) what is the likely ‘response’ of EU to this event with respect to EU rather than UK, and, 3) Atmosphere.
It is safe to state that significant matters outside our area of investment (and expertise) were the prime drivers of the market movements across the globe. The biggest event that took place in the month of June was the UK referendum on its membership of the EU. Polls leading up to the referendum were swinging about with leave taking a small lead vs. remain through to the last week where remain polls were indicating a very small margin win. The betting odds (although volatile) were indicating a win for the ‘remain vote’. The ‘smart’ money got it wrong: an overwhelming turnout (i.e. 33.5m votes within the context of total electorate of 46.5m) resulted in leave winning by margin of about 1.27m (17.4m votes in favour to leave).
For all non-financial companies/businesses that we look at, our primary focus is to get a real sense of a business’s ability to generate sustainably equity free-cash flow (‘E-fcf) given a view of macro-economic and competitive scenario. ‘E-fcf’ yield relative to the cost of ‘funds’ (debt) is one of the primary benchmark to sense the relative attractiveness of the investment under consideration.
To us, sustainability of dividend is of paramount importance, and we use our estimate of ‘e-fcf’ to assess sustainability of dividends: ‘e-fcf’ > dividends is the key. We are okay with the companies retaining some ‘e-fcf’ for ‘rainy-days’ or deleveraging for cyclical cushion. However, companies where we see dividends consistently above ‘E-fcf’ we believe are of poor quality and more akin to ‘equity-release’ rather than ‘equity-return’.
For the month of April, the indications of major movements/positions was similar to that of March: 1) Euro remained relatively stable (up 62bps in April vs 4.7% in March) with almost all the currencies in our region of focus behaving ‘in-line’ with the Euro, 2) Commodities performed better than the emerging market F/X on average with steel prices taking the lead (18-20%+) followed by crude (Brent) at 16% for the month, and, 3) better than expected 1Q results on a significant number of corporates (within our regional focus) drove the markets on the whole.
Statistical adjustments caught-up with Greece as the ‘money tap’ started to run dry when the GFC unfolded and the financial institutions started to look at how they can shrink their balance sheets. The Greek government declared that it was running fiscal deficits closer to 10% vs. 3% (as per Maastricht criteria), and approached the EU to ask for a programme and help to put Greek back on sound financial footing. The first EU-IMF-ECB (popularly known as Troika) bailout programme was introduced with an austerity plan requiring expenditure and revenue measures. At the same time, ‘non-Greek’ banks were trying to pull-out from Greece, aggravating the impact of austerity measures (revenue side suffered) as corporate Greece was faced to liquidity squeeze.
The trend which was forged in the second half of February continued into March with the following four salient features: 1) Euro saw gaining strength against the greenback (up 4.7% for the month) dragging with it almost all the currencies in our region of focus (the rouble took the lead at 11%+ appreciation, followed by Pln, Huf, Czk etc.) with the worst performing currency exposure in our portfolio at flat (Kazakh tenge). 2) Commodities stabilised during the month with a bit of upward movement bias, and, 3) more commentary on easing in Europe to continue, a slower rise in US rates and 4) Chinese authorities would act to preserve 6.5%+ GDP growth rate.
Instead of repeating the mantra of why investing in this region has a measurably attractive reward to risk profile, valuations are attractive, the underlying economic outlook has more potential to surprise on the upside etc., we would like to take the opportunity here to demonstrate through an example or ‘investment’ thought process (in a Socratic dialogue format).
February was a very volatile month in terms of equity and commodity market price movements, with the exception of Asia. It does not matter which index or commodity one looks at be it Dow Jones, Eurostoxx, Russia, Turkey, Poland, Brazil, Mexico, Italy, France, Crude Oil, Nickel, Copper or Steel (barring two exceptions: coal and gold), they all bottomed out by mid-February, following which most of them recovered if not all, a substantial proportion of ‘lost ground’
The markets with their price movements (stocks, bonds, commodities) are trying to tell us the following: a) global recession is afoot, b) financial crisis is emerging in Europe, c) pressure on commodities will continue and balancing/price stability is still out of sight and d) credit risks are expanding.
For better or for worse, the issue of CHF mortgages is blown out of proportion and has become a tri-party football match between the banks, the borrowers and the regulator.
Crowd funding websites are the modern day equivalent of this new breed of reality TV shows. Very often the business that gets funded is not the best business, but merely the most popular business. This, is where the parallel ends, however.
There are two Diamond News In November 2015.
Deutsche Skatbank, in the eastern state of Thuringia, plans to apply a negative rate of interest to current account deposits with balances over EUR 500,000. The bank presumably hopes to nudge savers into other longer-term, less liquid or higher-return investments and make some money by selling these.