May, May, Go away, Go away…

Still a day and a bit to go but looks like “sell in May and go away” did indeed work in Turkish markets. This is despite the fact that everyone and their dogs expected a “pre-election rally”. That was probably part of the reason why recent correction came with such a vengeance.

Barring a dead-cat bounce I am still not enticed by the prospect of Turkey within the EM equity space. Funds are waiting at the wings to re-enter EM equity for 2 reasons:

• That inflation and policy rates will peak sometime in early summer
• Soft spot in global economic growth will not last beyond Q3

These are neither relevant nor helpful for Turkey. There is bound to be tightening after the election of some sort so austerity story is about the start in Turkey when it is about to reach its end elsewhere in emerging markets. As far as the growth is concerned, heaven forbid that Turkish economy gets a second wind from re-accelerating global growth.

I have been very vocal lately about the current account deficit issue being a savings-investment gap. Until recently it seemed to have fallen on deaf ears but getting some traction lately. The problem is getting this financing gap down is harder than it looks. That is pushing up savings rate without undermining desirable investment growth. Savings are difficult to manage outside of the public sector. Demographic factors are often overlooked but play a key role in savings behaviour. Young Turks are risk takers and will run their balance sheets as aggressively as possible, borrowing, investing, going bust, coming back re-investing etc. It is usually assumed that retirement fund contributions are an obvious way to increase savings of the household sector. Sadly that may not work as higher retirement income tends to lead to running down precautionary savings now. Alas financial suppression still seems to be the only way beyond running tight fiscal policy (and hoping Ricardian equivalent does not kick in).