Turkey: From a Buy to a Hold

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Four months ago we ar­gued that the sharply de-rated Turk­ish eq­uity mar­kets were a buy. To sum up that ar­gu­ment, we thought that the po­lit­i­cal risk pre­mium was priced in, and that the con­di­tions were right for a smooth ad­just­ment of Turkey’s large cur­rent ac­count deficit. The bet on po­lit­i­cal and eco­nomic sta­bil­i­sa­tion has been re­warded by a 40% gain in Turk­ish stocks from their Fe­bru­ary lows. Look­ing ahead, a fur­ther sharp re-rat­ing of Turkey’s fi­nan­cial as­sets ap­pears un­likely now that valu­a­tions have nor­malised. But the rally may not be com­pletely over, as in­ter­est rates may have fur­ther to fall on the back of sup­port­ive lo­cal and global con­di­tions.

It is now clear that the cen­tral bank’s emer­gency rate hike in Jan­uary suc­ceeded in halt­ing the Turk­ish lira’s freefall fol­low­ing its -25% de­val­u­a­tion against the US dol­lar, help­ing to engi­neer a soft land­ing for the econ­omy. In ad­di­tion, March’s lo­cal elec­tions con­firmed prime min­is­ter Re­cep Tayyip Er­do­gan’s strong hand de­spite threat­en­ing street demon­stra­tions last win­ter. These de­vel­op­ments have led to a strong per­for­mance by Turk­ish as­sets. In US dol­lar terms, the MSCI Turkey in­dex has out­per­formed the MSCI Emerg­ing Mar­kets bench­mark by al­most 20% over the year to date.

Look­ing at valu­a­tions might sug­gest that much of the po­ten­tial up­side for Turk­ish stocks has now been ex­hausted. The P/B ra­tio is al­most back to its long term mean of 1.75, while the for­ward P/E ra­tio stands at 10.5, above its long term av­er­age of 9.65, in­di­cat­ing that the Turk­ish bourse is no longer un­der­val­ued. Af­ter a vi­o­lent but tem­po­rary de-rat­ing caused by rapidly ris­ing ex­ter­nal im­bal­ances, in­ter­nal po­lit­i­cal quar­rels and con­cerns about the US Fed­eral Re­serve’s ta­per­ing, the coun­try risk pre­mium has now fully nor­malised.

Eco­nomic data show that Turkey’s macroe­co­nomic ad­just­ment is go­ing smoothly, with no signs of a re­ver­sal. A cheaper lira has boosted ex­ports, while im­ports are slow­ing on the back of slower con­sumer credit growth, which has de­cel­er­ated from 27% to 15% in six months. Con­se­quently, Turkey’s cur­rent ac­count deficit, which stood at al­most 8% of GDP at the end of 2013, con­tracted to 6.5% in first half of the year, and should de­cline fur­ther to 6% or below by the begin­ning of next year. More re­cently, in­fla­tion has be­gun to turn down now that the ef­fects of the de­val­u­a­tion have been fully ab­sorbed. Af­ter peak­ing at 9.7% in May, the CPI eased to 9.2% in June, and a favourable base ef­fect should bring it down to around 7% by year’s end. Fi­nally, eco­nomic growth has con­tin­ued to cool off gen­tly, prob­a­bly reach­ing a trough of 3% this summer, com­pared with 4.5% a year ago.

This has al­lowed the cen­tral bank to grad­u­ally Jan­uary’s rate hike. And it has done so with­out re­verse putting down­ward pres­sure on the lira, thanks to a dovish Fed and ad­di­tional mone­tary stim­uli in the eu­ro­zone. This is cru­cial for Turkey, which de­pends on in­vestors’ ap­petite for risk, and so on global liq­uid­ity con­di­tions. Fi­nally, po­lit­i­cal con­ti­nu­ity looks prob­a­ble, as Er­do­gan is widely ex­pected to win a land­slide vic­tory in the up­com­ing pres­i­den­tial elec­tion on Au­gust 10.

All this should give the cen­tral bank room to con­tinue cut­ting rates, prob­a­bly by 50-100bp by the year’s end. Given the sen­si­tiv­ity of Turk­ish stocks to lo­cal in­ter­est rates-the in­verse cor­re­la­tion be­tween Turk­ish bond yields and eq­uity prices is al­most per­fect-this im­plies that there is still some up­side re­main­ing for Turk­ish stocks.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.