EEMEA: long Turkey credit Turkey has been one of the big underperformers among the major EM lately, and now valuations are the most attractive in a long time. Sovereign credit spreads are down to BB- levels even though the country is still rated as a BB+ credit (Chart 50). The lira which our Compass model has shown as overvalued for many years is now finally in line with the equilibrium of about 3.30 vs USD. The REER is almost down to the lows reached during the 2013 taper tantrum and 2015 China devaluation. In equities the discount vs GEM is at historical highs (Chart 51). So contrarians should get interested. To be clear, we have been warning for a long time that the leverage and stimulus driven growth model was weakening and needed a boost through supply side reforms. And obviously political events have been manifold. But as we are talking about year-ahead trades rather than the near-term ideas, we believe it is worth noting that Turkish markets have a habit of alternating between bad and good years: 2010, ‘12, ‘14 good; 2011, ’13 and ’15 bad. After another bad year in 2016, one could consider a possible rebound in 2017. Not a short-term trade This is not a 1-month but rather a 3-6 months trade, where Q1 will likely be critical. In the short term, US rates volatility is harmful for countries like Turkey that have funded large current account deficits with short-term debt. This interacts with the local sentiment weakness that has lately resulted in rising deposit dollarization. An acceleration of this trend would now be the biggest risk to asset prices, in our view. Before entering the trade we should see dollarization stabilize. Lately households have been net buyers of dollars for the first time since the coup attempt. We should see a couple of weeks of dollar selling to confirm that this potential risk is dissipating. The trigger for a rebound from low valuations likely lies in a stabilization of sentiment which could occur during the first half of next year. C