EMEA Fixed Income:Portfolio update -Turkey

2018 Outlook view: In our EMEA Fixed Income outlook published in early
December, we argued that Turkish local bonds have the most room to rally
across all EMEA fixed income markets; however, risks remain high in
light of geopolitical developments, FX sensitivity to external shocks
and the CBT reaction function to the expected decline in inflation
pressure. We also highlighted steepeners as one of our preferred
choices; however, we argued that first some FX stabilization was needed
for the latter to perform.

indicators, such as industrial production and manufacturing PMI, herald
thatsequential growth remained resilient during Q3, and only marginally
lower thanthe 2.1%QoQ recorded in April-June. Combined with
accommodative baseeffects from last year, this means annual headline
growth looks set to exceed7% in Q3, pointing to upside risks to our call
of 5.2% for full-year 2017.

    What happened? Turkish fixed income ended the year on a strong foot.
As a result of a decline in geopolitical tension with the EU and the US
as well as global tailwinds, FX stabilized and 10Y bonds rallied by 30bp
since mid-Dec to now 11.75% Although the December inflation print
surprised somewhat to the upside, price pressure nevertheless declined
due to positive base effect.

    In Russia, September data suggest that strong Q2 performance has
extendedinto Q3. We expect growth to reach 2.6% YoY in Q3 and see full
year growth at2.0%, with risks to the upside. Strong retail trade and
improving agriculturaloutput appear to have supported Q3 growth, even as
transportation and IPslowed. CEE continued to enjoy robust growth thanks
to stimulative monetaryand fiscal stances as well as supportive Eurozone

    We now see the timing and valuation as attractive to enter
steepeners in the Turkish XCCY swap curve.

    Inflation remained in check apart from Turkey where pressure for CBT
to act isbuilding. In Russia inflation continued to surprise to the
downside, reaching anew low of 2.7% in October; however, we expect
inflation to return towardsthe 4% CBR target in 2018 allowing the CBR to
continue with measured cuts.

    We expect the policy rate to reach 8% by end-2017 and 6.5% by

    Rising wage-cost and demand-pull pressure may pose
higher-than-expectedupside risks to core inflation across CEE3. CNB has
already embarked on agradual tightening cycle while NBP retains a
neutral stance and NBH getsready to ease further in expectation of some
deceleration in headline CPI in thecoming months. In Turkey, annual CPI
accelerated to a nine-year high of 11.9%YoY in October. We now expect
headline inflation to end 2017 at 10.3% YoYand average annual inflation
at 9% in 2018.

    Political and policy risks have been on the rise. In South Africa,
we are lookingat a busy few months of rating decisions, the ANC December
conference andthe February budget. In Turkey, notwithstanding a gradual
albeit welcomeresolution to the visa spat between Turkey and the US,
geopolitical riskpremium on Turkish assets remains high. In Russia we
are concerned aboutthe February 2018 US Treasury reports on the impact
of further sanctions andthe ongoing investigations into the alleged
Russian meddling in US electionsand links with the Trump campaign.
Tensions in the Middle East have broughtthe reform agenda in Saudi back
to the forefront of discussions, and theuncertainty around the outlook
for Lebanon has intensified.

    After months of strong performance, EM(EA) Fixed Income came
underpressure in October, providing the weakest monthly performance YTD.
On theexternal front, driven by US dollar strength, expectations of a
December hikeby the Fed, and concerns around US tax policy, as well as
idiosyncratic reasonsparticularly across the EMEA high-yielders, were
responsible for the selloff.



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