The Borsa Istanbul has been breaking consecutive records and the most popular Turkey exchange-traded fund (ETF), the (TUR), is on a roll. Discussion centre on when the correction to the rally will come.

The TUR, Nasdaq-listed and USD-denominated, was up 8% y/y to 29.2 as of January 17 after posting a 14% annual return to end-2019 at 27.1. That’s a sharp recovery from the 20s in May 2019 and the 22s in October, but it’s still dramatically below the historical high of 79 seen in 2010.

The Berlin-listed iShares MSCI Turkey ETF (ISVZ) was up 12% y/y to 26.36 on January 21 while the Mexico-listed MXN-denominated iShares MSCI Turkey ETF (TUR) was up 12% y/y to 546 as of January 16.

TUR, the only ETF that offers pure exposure to the Borsa Istanbul, replicates the MSCI Turkey IMI 25/50 Index, which covers around 99% of the free float-adjusted market capitalisation on the Istanbul stock exchange.

It has 42 constituents. Garanti BBVA has the highest weight, at 10.47% as of January 17, followed by Akbank (9.35%), BIM (7.73%) and Koc Holding (5.79%).

The London-listed GBP-denominated HSBC MSCI Turkey UCITS ETF (HTRY) was up 5% y/y to 205 on January 21 while the Xetra-listed EUR-denominated HSBC MSCI Turkey UCITS ETF (H4ZK) was up 8% y/y to 2.42 and the Paris-listed HSBC MSCI Turkey UCITS ETF (HTR) was up 8% y/y to 2.41.

The HSBC MSCI Turkey UCITS ETF replicates MSCI Turkey Index (MITR00000PTR).

Garanti BBVA has the highest weight, at 14.69%, in HSBC’s Turkey ETF, followed by Akbank (13.19%), BIM (10.88%) and Turkcell (8.3%).

Mainstream view

Analyses in the mainstream media point to Turkey’s series of aggressive policy rate cuts, a “decent inflation outlook”, a “rebound in GDP” and relatively cheaper valuations in attempting to explain the latest Borsa Istanbul surge.

When the stock exchange falls on the near horizon, expect the same commentators to explain the descent by referring to local factors such as Turkey’s newly negative real rates, geopolitical tensions and so forth. The truth could be rather uglier and wider-ranging. Shuddering in fact. But, as always, holders of Turkish stocks have bought based only on their own decisions. As they’ve not bought based on macro fundamentals, they’re not looking to sell them based on macro evaluations.

The Institute of International Finance (IIF), a finance industry body, observed on January 16 in a research note entitled “Too frothy?”: “Rising tide lifts all boats: With U.S. stocks reaching record highs as Washington and Beijing ink a new phase one trade deal, soaring valuations are once again under scrutiny. While loose global financial conditions remain broadly supportive for share prices, liquidity is still the principal driver, given the broadly subdued corporate earnings outlook. This has fed into concerns that valuations are becoming increasingly stretched.

“Equity prices relative to forward earnings are well above their long-term averages in many cases, including the U.S., Euro Area and parts of Asia including India and Thailand. In contrast, equity valuations in Japan and much of EM ex-Asia are still below historical averages, despite rising in 2019.”

The IIF added: “Debt volcano: With global debt nearing $253 trillion in Q3 2019 and a new high debt-to-GDP ratio of 322%, we estimate that total global debt will top $257 trillion in Q1 2020 as low global rates and loose financial conditions persist… While many of the associated risks are long-term in nature, debt maturity profiles highlight rollover risk this year: we estimate that more than $19 trillion of debt needs to be refinanced through 2020 across key EM and G4 countries (Chart 3). Maturing shortterm debt securities constitute over 40% of that, and the U.S. alone will face over $7.4 trillion in refinancing costs.

“Across emerging markets, bond, bills and syndicated loans coming due this year stand at around $5.4 trillion, with China accounting for $3.2 trillion of that. In 2020, EM foreign currency redemptions will likely exceed $820bn, of which over 80% is denominated in USD.”

Closed market

However, it’s not possible to entirely explain the Borsa Istanbul rally by simply taking account of the latest money printing fest contrived by the Trump administration because the Turkish equity market is de facto a closed market right now under the heavy control and scrutiny of a government that politically and economically is walking a fine line. It is not attracting substantial foreign interest.

How it is that so many global financial players and commentators still seriously see the Turkish capital markets as “free market” is beyond this column.

Finance Minister Berat Albayrak made another intervention betraying the reality of the situation on January 20 when he criticised private banks for taking a profit-oriented approach to their banking. Private lenders should support the real sector just like state banks do and keep up with the changing environment, he said. His words came a few days after a competition probe was launched against 20 local lenders (see below).

Local analysts see the fuel of the latest stocks rally in purchases of pension and other government-controlled funds, such as the unemployment fund, and also in some individual investors running away from deposit rates that stand even below official inflation (we’ve written about the difference between that and unofficial inflation ad nauseam).

There is also talk of there being no real foreign interest in the rally, with uplift coming from local individuals buying small caps.

The volume of inflows that can be attributed to local individuals is questionable, but there is one certainty—none of them believe in the official macro outlook. The other suspect in the rally, government-controlled local funds, invest on order.

The sight of individual investors once again losing their money would be no surprise. It’s been seen several times since the establishment of Borsa Istanbul in 1985. However, the market situation currently being experienced is markedly different from what was witnessed before. What we have is a closed market under the control of “The Dude”—a mysterious algorithmic trader who has worked in favour of the Erdogan administration since the beginning of 2016—and supported by long-term purchases of government-controlled local funds.

But whatever the drivers of the rally, its current levels are causing even local finance industry commentators to warn Turks about the possibility of a correction.

“Way ahead may not be smooth”

Sanghamitra Saha of Zacks on January 20 questioned the sustainability of the TUR resurgence in a story entitled “Turkey ETF Rallying Hard: How Long Will the Trend Last?” “The way ahead from here may not be smooth… So, even if there is a rally in TUR now, the winning momentum may fade in the medium term,” Saha said.

Getting back to the competition probe into lenders, Julian Rimmer of Investec said on January 20 in an emailed note to investors: “The Turkish govt needs some cash so the Competition Board decided to investigate 20 banks, most of whom will be tapped for 1-2% of 2019 revenues by way of a fine. Most have provisions for this kind of bank robbery but it's symptomatic of the cash crunch experienced by the govt.

“AKBNK [Akbank] absorbed the sale of a 1.9% stake well last Thursday but questions linger why the strategic holder was getting out, especially just after a Capital Mkts Day brimming with corporate optimism. Moodys remarked today that negative real rates was not positive for Turkish banks (and I thought statin' the bleedin' obvious was the unique preserve of salestraders?) and I still think caution is advised but happy to persevere with MGROS SODA MAVI [Migros, Soda Sanayii, “Mavi Jeans”] with a punter's side portion of EKGYO [Emlak Konut Real Estate Investment Trust].

“EM has started 2020 in ebullient form but this is often the case and… seasonality is [important] for the asset class generally. Most performance over the last decade has been registered in the first quarter and January trends are often unreliable. Lunar New Year in Asia, the perennial optimism of fools, a lack of anything else to do in January...” .

Q4 financials, get set

Garanti will launch the Q4 financials season on January 30 while Akbank will follow on January 31 and Isbank will be awaited in the first week of February, according to Seker Invest’s earnings preview note.

But before then, how much indigestion will the regulators’ treatment of the banks have caused?

“On Friday evening (17 January), we received media reports speculating that the competition authority has started a ‘pre-investigation’ on 20 Turkish banks, which looks to be comprehensive. We see the news as a medium-term risk, if the watchdog acts in a heavy-handed way. That said, we believe a potential fine is just noise. The signs are, in our view, that the bureaucracy is not happy with the current credit conditions, and probably with the price of credit in particular. This would add to the narrative that the profitability equilibrium has shifted and, although the earnings may improve cyclically thanks to rate cuts, the structural challenges remain,” Can Demir of Wood & Company said on January 20 in a research note.

“The [competition board] is reportedly investigating whether the banks are violating relevant laws in the deposit, exchange and intermediary services. The names of the banks have not been announced,” Raiffeisen Centrobank noted.

“The authorities are clearly not content with the pace of the recovery and are pulling out all the stops to stimulate activity… It’s difficult to say for certain when [lingering vulnerabilities in the banking sector] will crystallise but it’s safe to say that the next time that Turkey faces a crisis, the fallout for the banking sector is likely to be a lot worse,” Jason Tuvey of Capital Economics said on January 21 in a research note.

“The little punt in EKGYO, based purely on the decline in rates rather than its (highly dubious) quality, has been a rewarding little fizzer with an 8% spike since mid-last week. They upped NI guidance 30% above the mkt today and forecast revenues to climb from 3->5bn TRY in 2020… this company… is pure AKP [Justice and Development Party]… and mgmt was arrogant to the point of hubristic when I saw them last in Feb 2015 and I still remember now,” Rimmer said on January 21.

Emlak Konut Real Estate Investment Trust targets TRY5.12bn in sales revenues (TRY708mn in Q1, TRY903mn in Q2, TRY1.6bn in Q3 and TRY1.9bn in Q4) and TRY1.13bn net profit for 2020, the company said in a stock exchange filing on January 20.

The company sold 2,056 independent real estate units in 2019, it said in a separate filing.