We love the analogy OYAK Securities used for investing in EM, and the compressed summary of 2019 macro forecasts. The report draws attention to improving macro-fundamentals from a currency and interest rate perspective, and profit draught, which compels OYAK analysts to keep their target for BIST-100 modest:
Walking on the Hongyagu Bridge
Opened in December 2018, the Hongyagu Glass Bridge in China’s Hebei province is the longest glass bridge in the world, which is designed to sway a little when visitors walk on it. The transparent walkway sits 230 meters above the canyon floor and is more than 490 meters long. The view on the bridge is breathtaking but the journey from one end to another is thrilling, which feels like investing in the emerging markets. We think that investing in Turkey will be no less thrilling than the spectacular Hongyagu Bridge in 2019, considering the challenging macroeconomic, political and global environment.
Headwinds from the macro side look manageable
Our base case scenario is based on soothing concerns over global growth, two rate hikes from Fed, eased tension between China and US, revival of capital flows to EMs, ease of pressure over exchange rate, two-quarters long recession in Turkey, tight fiscal and monetary policy, lower borrowing costs thanks to lower risk premium, lasting deleveraging in both banking and real sector but at a decelerating pace. Within that context, we expect 0.5% GDP growth in 2019, a benchmark rate of 16.0% thanks to lower risk premium despite higher global rates and a more modest depreciation in TRY bringing end-year USD/TRY to 5.89.
Revival of the domestic demand is much sought after
One of the main struggles of 2019 would be to achieve a recovery in domestic demand that was hit severely in 2018 due to rising inflation, higher borrowing costs, volatility in TRY, deterioration in the employment, economic slowdown and weakening consumer sentiment. So far we haven’t seen a substantial improvement in any of these measures that would bring the consumers to the high streets.
BIST is trying to catch up with the EM universe
MSCI Turkey underperformed its peers by a wide margin in 2018 as the index declined by 43% compared to MSCI EM’s 17% decline. Turkey had a strong start to the year with 14.3% ytd increase higher than MSCI EM’s 6.6% increase. At 7.6x 2019E P/E, MSCI Turkey is still trading with a significant 35% discount compared to MSCI EM’s 11.8x P/E, higher than historical average discount of 25%.
If Turkey plays its cards well, we believe that BIST has a strong potential to be the sweetheart of the EM investors once again considering the potential rerating of the valuations as well as improvement in the risk perception.
Calculating a limited 15% upside for BIST100
We expect 5% EPS growth for our coverage universe on 10% EPS growth for non-financials and 4% EPS contraction for financials. Based on our assumptions, our 12-months BIST100 target stands at 120k, which offers 15% upside potential. We see both 15% upside for financials and non-financials.
Upside risk on our index target may come from assigning a lower risk free rate in our valuation models from current 17%.
Preferring a stock selective strategy rather than a sectoral theme
Given the relatively high amount of uncertainties and headwinds, expected especially in the first half of the year, it would be a very bold call to imply a market direction. Our top-picks outperformed the BIST100 by 3% ytd on top of a 3% outperformance in 2018 thanks to our stock selective strategy that proved its merit. We continue to highlight the companies that are anticipated to post strong operational performances and have expected catalysts.
Our model portfolio includes ASELS, GARAN, HEKTS, OTKAR, TKFEN, TRKCM, TTKOM, TUPRS, YKBNK and ZOREN.
From OYAK Securities 2019 STRATEGY REPORT