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Seeking Alpha:  Why you should own Turkish equities now?

Turkish financial assets have been the black sheep of the EM family since the August 2018 Pastor Brunson crisis with…

Seeking Alpha:  Why you should own Turkish equities now?

Turkish financial assets have been the black sheep of the EM family since the August 2018 Pastor Brunson crisis with US, which triggered a currency collapse and widespread fears of a balance of payments crisis. These nightmares didn’t materialize, but currency depreciation rapidly passed through to prices and then to interest rates, causing a recession.

 

To deal with the recession the new economy czar Mr. Berat Albayrak resorted to short-cuts such as unprecedented fiscal stimulus, using state bank balance sheets to dole out subsidized loans to companies and finally  to out-right trickery such as locking up the SWAP market to prevent further depreciation of the TL.   Finally, it is difficult to claim Turkey is over the hump. 2Q2019 surveys indicate a double  dip recession, while the S-400 crisis with US-NATO could open the way for a sequel to Pastor Brunson crisis.

 

 

All this being said, “value” matters and Turkish equities are indeed cheap.  While earnings forecast may be subjective, P/BV and EBITDA streams suggest the BIST-100 Index is massively oversold. Therefore, PA Intelligence wished to share excerpts from the Seeking Alpha article by “Rational Expectations” arguing the investment case for Turkish stocks:

 

Now is the time

 

Now is a good time to add exposure to Turkey (TUR) to your portfolio via the iShares country ETF. Turkish stocks are inexpensively trading at 6x earnings, and exports should almost mechanically boost growth after the fall in the Turkish Lira.

 

Mr. Market loves to swing between the extremes of fear and greed. Turkey shows this. It is a significant global economy, with the 20th largest economy in the world, about the size of Switzerland or Sweden. However, in late summer 2018, an economic crisis hit Turkey. A credit crunch hit after a lending binge, and the Turkish lira almost halved (see chart below). In response, the central bank raised interest rates to 24%. In addition, Turkish core inflation spiked into the high teens. Turkish interest rates and inflation remain elevated today. Turkish unemployment is now approaching 15%, the highest level in a decade.

 

 

The Risks Of Erdogan

There are political risks too. After the failed coup of 2016, Turkey has migrated to a presidential rather than a parliamentary system and President Recep Tayyip Erdogan has been criticized for his human and civil rights record.

 

In fact, Erdogan was imprisoned for inciting religious hatred in 1999 early in his political career. Censorship is high in Turkey, for example in H2 2018, Twitter received more removal requests from Turkey than any other country (though note China, North Korea, Iran and Turkmenistan block Twitter entirely). Still, though this makes bleak reading, it is less significant from an investment standpoint. Research by Credit Suisse in 2015 has found that countries with high corruption levels tend to see better than average stock market performance.

 

A Positive Outlook And Valuation

So why bother? Terrible economic data and a potential corrupt political environment do not inspire confidence. Nonetheless, Turkey may be set to outperform, simply because the situation is likely to improve from here. Past research on Turkey’s own history and the fate of countries in similar situations bears this out.

 

Just as we’ve seen many times in the past with the Dogs Of The World strategy, which involves owning the country ETFs of past poor-performing countries, it is now hard for things to get too much worse in Turkey and significant upside is on the table should things improve. This is especially true against an undemanding 6x earnings multiple. Research Affiliates estimate Turkey is now in the 3rd percentile of its historical valuation range. As such, Turkey is about as cheap as it has ever been, at a time when most global markets are at least moderately expensive on traditional valuation metrics. That’s why owning an ETF holding a range of Turkish stocks may be a smart move.

 

Perhaps the easiest way to illustrate this point is with two recent examples. The first example is Russia (ERUS), after a crisis in the currency caused in part by reactions to its Ukraine aggression and weak oil prices, Russia has seen material performance in recent years up over 40% in aggregate. Here we use a Russian ETF as a proxy for the market.

 

Valuation

Valuation supports this. Turkey currently trades on both a PE and 10-year PE (CAPE) of under 8x and has a dividend yield approaching 4%. At a time when the U.S. market trades at double to triple those valuation metrics, there is relative valuation to support for Turkey. Plus, Turkey is reasonably well-diversified as a country with major products including textiles, electronics, cars and steel. The country is not exposed to just a single sector of the global economy, which could add risk. With some country ETFs you are placing a bet on just a handful of companies or a particular sector that dominates an economy, but with Turkey your risk is spread more broadly.

 

 

Excerpt only, to read the entire article,  click the link here

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