Equity Strategy for 2020: Time for Turkish underperformance to end
Turkey’s top non-bank financial services company Unlu Co’s research team predicts strong equity rally in 2020
Turkish equities rallied strongly in December and January, as global EM environment improved, Central Bank rate cuts began stimulating economic growth and the discount to EM peers began to be noticed by bargain hunters. Is the rally over, are Turkish equities in overbought territory? Turkey’s top non-bank financial services company Unlu Co’s research team says no. Their research determines an end-2020 value for BIST-100 Index of 144K, which closed at 118K. Currently, consensus target for end-2020 BIST-100 is 129.5K. The following are key paragraphs from Unlu Co report titled Strong EPS growth to carry the index:
2020 is set to be a year of rebounding economic activity, double-digit inflation and low interest rates
Our underlying assumptions for 2020 consist of a strong rebound in economic activity in Turkey, supported by the lagged impact from the large monetary stimulus delivered in 2H19 and the favourable base; declining, albeit high inflation; competitive currency and the continuation of geopolitical risks.
Following 0.5% growth in 2019, we expect the GDP to grow by 4.0% in 2020, with risks tilted to the upside, thanks mainly to loosening financial conditions and pent-up demand. Inflation will edge up somewhat higher in 1Q, driven by the unfavourable base, but gradually retreat thereafter to close the year at 10.4%. Following 1,200bps cut in policy rate in 2019, we assume a further 200bps cuts until the end of the year.
Turkish equities should benefit from the potential outperformance of EM
Following years of underperformance, the long trend of EM underperforming DM may come to an end in 2020, thanks to: 1) an accommodative Fed and low global rates, which may encourage investors to look at higher-yielding assets; 2) the widening EM-DM economic growth differential; 3) the weak outlook for the USD; 4) a potential de-escalation in global trade tensions; 5) cheap valuations; and 6) stronger EPS growth potential.
Despite several Turkey-specific risks, fund inflows into EM should also help Turkish equities to continue recovering given Turkey’s high beta status on EM trends. We believe that the favourable global backdrop, coupled with a bottoming out in the Turkish economy, may potentially act as a catalyst for a re-rating in Turkish markets in 2020.
Even if Turkey is not re-rated, strong EPS momentum in 2020 could carry the Turkish equity performance: Turkish equities currently trade at about a 51% discount to EM on a trailing P/E basis (vs. the five-year avg of 35%), as Turkey-related risks, such as the ongoing uncertainties over monetary policy, developments on the Syrian front and US-Turkey relations, etc. weigh on sentiment. We believe that even if the market remains at a deep discount in 2020, strong EPS momentum, following the stagnant performances of the past two years (+35% y/y in 2020 vs. -4% in 2019 and +10% in 2018) could carry the Turkish index.
Myriad of risks
Despite our sanguine view on the market, there are several risks to watch out for. A change of course in Fed policy, souring relations with the US (risk of sanctions, Halkbank case), an overly expansionary monetary policy by the CBRT and a jump in oil prices as a result of US-Iran tensions appear to be the leading risks for 2020.
Reducing RF assumption: In this report, we have reduced our risk-free rate assumption to 14.0% and incorporated our most recent macro assumptions into our models. Plugging in our new price targets, our bottom-up index target for the next 12 months rose from 134,836 to 144,259, which implies ~22% upside potential vs. the current level.
We have removed Koza Gold and Tupras from our Top Picks, and added Tekfen and Turk Traktor into the list. Accordingly, Akbank, Garanti, Tofas, Turkcell, Sabanci Holding, Tekfen, Turk Traktor and Ulker are the constituents of our model portfolio.