Turkey’s central bank will do what is necessary to stabilise the lira and contain inflation, say Credit Suisse’s Paul Fage, Berna Bayazitoglu and Kasper Bartholdy. “The forward curve is implying further hikes of the order of 250 bps... We think that inflation will peak at around 12% in July, declining to 6 to 7% by the end of 2007... For investors who can take a medium-term view we think current levels represent a good point to start increasing interest rate positions in Turkey.”
Magar Kouyoumdjian at Standard and Poor’s says that Turkey’s banking system is “now much better prepared to resist such trauma”. Turkish banks no longer maintain large short currency positions, a shift that minimises foreign exchange losses. The elimination of related-party lending among private banks, and subsidised loans and insolvency in some state-owned banks, means the system is “financially stronger to cope with mild short-term stress.”
Opportunities in Colombia’s 14-year bonds are the focus of DrKW’s Arko Sen and Arnab Das. Two weeks ago they recommended buying Colombia 14-years, that were trading 13 basis points above Venezuelan 14-years.“The continued underperformance of Colombian equity markets has led to weakness in spreads, especially CDS and filtering into bonds. In our view, the slightly wider spreads relative to Venezuela now offer even better entry points for rel-val trades or buying into Colombia’s story.”
Colombia is looking up: President Uribe is looking to push tax reform through congress, capital controls have been lifted and the ratings agencies are upbeat. “Venezuela, meanwhile, is expensive. Especially when oil and commodity prices are tumbling.”
Meanwhile, Barclays Capital’s Paul Horsnell and Kevin Norrish are bullish on oil. “If you only read... the commentary of many commodities analysts, then you would feel safe in assuming that... one more interest arte rise is all that it needs to force the global economy to fall into the cold dark void.” Further rate increases are needed, they argue, because key economies are strengthening faster than expected, and will support robust commodities prices. Barclays Capital revised up its forecast for this year’s Chinese GDP growth to 10% from 9.4%. “Selling commodities because of a macroeconomic assumption of tightening monetary policy is an approach that gets the order of the horse and the carriage thoroughly mixed up.”
Goldman Sachs economists Sandra Lawson, David Heacock and Anna Stupnytska focused on infrastructure opportunities in the BRIC countries (Brazil, Russia, India, China). In 1995 only three people in one thousand had mobile phones in China; by 2004 more than 250 did. Russia consumes about 70% of the G6 average in electricity, while rural India consumes 10%. China tops the list of countries ranked by number of infrastructure projects, accounting for 15% of projects worldwide.
Goldman Sachs estimates that over the next five years there will be nearly $2 trillion of investment in phones, electricity and roads in the BRICs. Roads will account for the largest share of investment, at 40%, followed by electricity at 28%, and mobile phones at 27%. The infrastructure gap between the BRICs and the G6 is worth $10 trillion, and could take the BRICs 25 years to close.
Credit Suisse’s Dong Tao and Sheila Yip expect new tightening measures from the People’s Bank of China after Premier Wen Jiabao vowed to take “decisive measures” to slow investment and loan growth on Wednesday. The risk of a rate hike is rising, and although the timing is unclear, Tao and Yip say that deposit and lending rates will rise by 27 to 54 basis points by the end of the summer. “China is experiencing ultra loose monetary conditions; so a few rate hikes probably will not drain liquidity back to normal levels in the near future.” Restrictions on foreign investment in China’s property market are also likely in the next two months. “We stay with our 10.1% GDP growth forecast for 2006.”