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Turkish equities: Is there any value left?

Turkey’s stock market, now renamed BIST from ISE is one of top performers among the high-flying Emerging Markets universe.

Is there any value left?

Turkish equities:  Is there any value left?

Turkey’s stock market, now renamed BIST from ISE is one of top performers among the high-flying Emerging Markets universe.  Driven by soaring company profits, appreciating TL and return of political stability after  many elections and an abortive  coup, the prime  equity index, BIST-100 has risen by 40% YTD, but has stumbled over the last week. With growth believed to peak in 3Q2017 and  to slow afterwards, while the world debates the impact of Fed balance sheet reduction on EM, it is time to ask whether there is any value left in the BIST?

One of Turkey’s leading brokerage houses, OYAK Yatirim (Investment)  issued its monthly strategy report on 14 September, where its analysts argue that on a comparative basis, there is plenty of room for rally. The main take-aways from the report are as follows:

Positive divergence of Turkish equities continues

Turkey extended its gains against other peer markets and became one of the best performing emerging markets with MSCI Turkey Index increasing by 42% YTD, outperforming both MSCI EM (+28% YTD) and MSCI EMEA (+9% YTD). At 9.1x 2017E P/E Turkey is still trading with a 34% discount to MSCI EM’s 13.7x 2017E P/E, still at a wider discount to historical average of 14%. Note that, MSCI EM reached its highest level in the last decade, while MSCI Turkey is still some 40% below its peak. Volatility Index (VIX) that declined below 11 level, after exceeding 16 in the last month continue to fuel risk-on mode and support the upward momentum in the global equity markets.

Supportive macroeconomic dynamics vs unsettling geopolitical developments

Strong GDP growth in 1H17, benefiting from government’s successful measures, triggered upward revisions in 2017 GDP forecasts to over 5%. We expect the positive momentum in GDP growth to continue in 3Q, thanks to last year’s low base where GDP contracted by 0.8% in 3Q16. Turkish companies, especially exporters, will benefit from extended rally in EUR/USD parity in 3Q17 as USD is the functional currency for intermediary goods imports and exports are generally directed to Euro zone in EUR. CBT’s tight monetary policies and diminishing political uncertainty enabled TL to strengthen. On the flip of the coin, stretched Turkey-Germany relations, ongoing arm wrestling in Syria and upcoming court cases in US may act as potential risks going forward.

Upbeat outlook for banks

We anticipate strong asset quality to continue in the coming quarters thanks to accelerating economic growth and CGF support. Higher deposit costs and lower CPI linker income may weigh on NIMs in 3Q17, though we had seen significant repricing in loan rates which should support margins in the coming quarters. Banks underperformed BIST100 index by 8% since April 18, despite a 15% rally in the latter as investors were concerned about rising deposit rates. With deposit rates stabilizing recently, we believe banks may have seen the worst. AKBNK and GARAN continue to be our top picks.

Selective buying strategy is paying off 

Our model portfolio yielded a strong 5.4% return and outperformed the BIST100 index by 4.0% since our last reshuffle on July 21, 2017, bringing the portfolio’s year-to-date outperformance to an unmatched 24.2%, with 72% absolute return. We are excluding BIMAS and THYAO on strong performance as they outperformed BIST100 by 13.3% and 8.3%, respectively and replacing them with TAVHL and TRGYO. We believe that strong pax recovery and strong EUR will be supportive for TAVHL’s operational performance in 3Q17 and recent sell-off provides a good entry level. TRGYO’s risk profile will decline considerably and cash generation capacity will accelerate substantially with the launch of up-scale Pasabahce project. Our model portfolio now includes AKBNK, GARAN, PETKM, TAVHL, TKFEN, TTKOM, HEKTS, TRGYO, TRKCM and USAK.

Of course, there are plenty of risks, as well. BIST is a high-Beta market, meaning that a sudden reduction in EM risk appetite could upend the Turkish rally.  Over the last 10 business days, TL has reversed course against the American Dollar, and remains extremely sensitive to Fed and Trump decisions. Finally, political risks could be escalating in October.

  • Germany is actively talking up economic sanctions against Turkey.
  • A criminal case in New York courts involves Turkey’s state-owned lender Halkbank, which could reduce demand for the stocks of Turkish banks.
  • Government ministers and President Erdogan’s advisors are publicly mulling whether it would be wise to intervene in the F/X and loan markets (to reduce interest rates) which could spook investors.


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