A fully anticipated Fed “shock”

• “Buy the rumour, sell the fact”. The Fed’s moves were anticipated, and 125 bps rate hikes have already been priced in. This is because the Fed has been totally transparent. There is no surprise. Anticipated shocks don’t create havoc in the markets; unanticipated ones do.

• There is more than meets the eye, though. The Fed’s balance sheet will begin to shrink this summer. It could easily be halved within a couple of years. This means that pricing the Fed’s rate hikes isn’t sufficient to understand what might actually happen.

• If the Fed downsizes its balance sheet by USD 200 billion, the impact will be roughly equivalent to a 25 basis points interest rate hike. We are talking about a downsizing of USD 4.5 trillion. In reality, monetary tightening will be stricter than what the interest rates alone tell us.

• This means we are now in a perfect foresight world. The Fed made sure everyone understands what it is about to do. Except Turkey, perhaps, and some Pacific Rim countries.

• Central banks have raised their policy rates with the anticipation that the global flagship, the Fed, would do so. Paradoxically, when the Fed rate initiates a rate increase sequence, not only does the dollar index appreciate, but other assets, especially stocks, gain value as well.

• Turkish banks are being traded at c. 0.5 x book value (0.40 P/B 2022E) on average. This is a very low multiple. Any P/B that is below 1 (below par) means a discount. There may be an opportunity therein.

• Clearly TL interest rates are deeply in the negative territory. TL deposit rates are about 18% if we take the average of 1-3-6 month time deposits. Inflation is more than twice that.

• The obvious investment alternatives were – and still are- FX, gold, and real estate. Stocks can be a new alternative if investors feel that valuations are too low.

• Having said that, the current monetary/ fiscal policy mix is a loose one. Nobody fights inflation that has already jumped to c. 50%. Non-residents have already left the bond market, and they are inactive in the stock exchange. Nothing much can happen if this picture doesn’t change.