Turkish stocks, the best in the world last year, are now the cheapest in 12 months as political protests and capital flight curb investor appetite for equities. Stocks in the Borsa Istanbul-100 Index (XU100), which has lost 22 percent into a bear market from a record on May 22, traded at 9.2 times the next year’s estimated earnings, near the lowest since July 2012. That compares with 9.9 times for the MSCI Emerging Markets Index and 14 for the Standard & Poor’s 500. While shares fall, profits are estimated to climb 5 percent in the next 12 months, compared with a 7 percent drop for the MSCI EM EMEA Index, according to data compiled by Bloomberg.
Protests against the government and indications that the Federal Reserve may start reducing asset purchases sent Turkiye Is Bankasi (ISCTR), the nation’s largest bank, down 35 percent since May 22 and Istanbul-based Haci Omer Sabanci Holding AS (SAHOL) 24 percent lower. While bears say stocks are poised to drop further as elections loom, bulls point to economic growth that’s more than double that in Europe, the Mideast and Africa.
“For investors whose investment horizon is at least one year, there are attractive stocks,” Aziz Unan, a portfolio manager who helps oversee $750 million in assets including Turkish shares, at Renaissance Asset Managers, said in emailed comments on July 9. “We may gradually increase our exposure in shares that have become cheaper.”
Demonstrations were ignited in May by police tear-gassing Istanbul’s Gezi Park, occupied by people who opposed plans to tear it down. Unrest spread in June as protesters accused Prime Minister Recep Tayyip Erdogan’s Islamic-rooted government of adopting an increasingly autocratic style, condoning police brutality and curbs on alcohol sales. Protests calmed since police forced protesters from the park and adjacent Taksim Square and Huseyin Celik, a government spokesman, said June 19 that the city’s population will vote on the park project.
Erdogan, who was first elected prime minister in March 2003, has described the protesters as pawns of an “interest-rate lobby” whose goal is the destruction of a government that reflects the national will.
The lira depreciated 4.2 percent against the dollar since May 31, the third-worst performance among 24 emerging-market currencies tracked by Bloomberg. The yield on two-year benchmark notes surged 34 basis points to 9.59 percent Thursday, up from a record low of 4.79 percent on May 17.
Foreign investors in Turkey’s stock market posted net withdrawals of $98 million in the week ended July 5, their sixth consecutive week of selling that totaled $1.3 billion, central bank data published July 11 showed.
“Fear being the main driver, investors tend to look at the empty half of the glass,” Cemal Demirtas, head of research at Ata Invest in Istanbul, said in a phone interview July 10. “We prefer to look beyond that, as Turkey’s fundamental picture remains essentially unchanged.”
Turkey, which is rated an investment grade Baa3 at Moody’s Investors Service and BBB- at Fitch Ratings, has a single-party government that can make rapid decisions, a central bank with a successful track record and fiscal discipline, Demirtas said. Ata Invest expects the benchmark index to reach 90,000 in the next 12 months, implying a gain of 25 percent from the 71,789.85 close Thursday.
Turkey’s economy grew 3 percent in the first three months of the year, the 14th consecutive quarter of expansion and compared with 1.4 percent in EMEA. Gross domestic product probably increased another 3 percent in the second quarter, in contrast to a contraction of 0.9 percent for the Euro Area, according to the median of four and 35 analysts’ estimates, respectively, data compiled by Bloomberg show.
Prospects that the Fed may start scaling back its bond-buying program this year are making other fund managers more cautious. Melih Onder, chairman of Istanbul-based asset manager Logos Portfoy Yonetimi AS, said the 40 million-lira fund he manages lowered the weighting of equities to about 15 percent from as much as 25 percent in response to comments by Fed Chairman Ben S. Bernanke on June 19.
“I’m bearish on equities for the next few months,” Onder said in a phone interview June 26. “To increase equity investments, we have to feel that the accelerated selling has completed its course – that might take about three months.”
As Turkey moves closer to local and national elections, the stock market may reflect that risk, Emre Akcakmak, who helps manage about $600 million in Turkish equities at East Capital in Stockholm, said by phone June 26. Erdogan is considering holding local, presidential and general elections in 2014 rather than over the next two years, Milliyet newspaper reported in June.
“Political risk is inherent in emerging markets,” Akcakmak said.
The stock market rout pushed the average estimated price-to-earnings ratio of companies on the benchmark below the three-year average multiple of 9.8, according to Bloomberg data.
Isbank, which boosted net income by an annual 45 percent to 1.02 billion liras ($521 million) in the first quarter, trades at a forward price-to-earnings multiple of 6.6. Sabanci Holding, which controls Carrefour SA (CA)’s local joint venture, shares fetch 8.9 times estimated earnings, down from 12 on May 22. The company’s profit surged 93 percent to 570.7 million liras in the first three months.
Earnings multiples compare with 11 for the Standard & Poor’s 500 Banks Index and 14 for Boulogne-Billancourt, France-based Carrefour.
“Over the longer term, Turkey has a lot of positive fundamentals such as a young, well-educated population, good and improving infrastructure, hard working people and a strategic location,” Patrick Lemmens, a senior money manager who helps oversee about $13 billion at Robeco Groep in Rotterdam, said on June 27.
About 40 percent of Turkey’s 75.6 million people are between 15 years and 40 years old, according to the Turkish Statistics Office in Ankara.
Lemmens said he raised the share of Turkish stocks in Robeco’s 170 million-euro global financials fund, without providing further details. “There is some political noise, but ultimately Turkey is a democracy.”