TURKEY INSIGHT: Will dead cat Borsa Istanbul bounce higher?

TURKEY INSIGHT: Will dead cat Borsa Istanbul bounce higher?
"The Anatomy Lesson by Dr. F. Ruysch" (Adriaen Backer). Such is the potential for economic ruin in Turkey, any foreign investor arriving there might be advised to bring an autopsy face mask.
By Akin Nazli in Belgrade March 3, 2020

The sharp sell-off in global markets amid concerns about the coronavirus, coupled with heightened geopolitical risks for Turkey, has created a unique buying opportunity in Turkish banks, in VTB Capital’s view. Akin Tuzun of the Russian investment bank made the case on March 3 in a report entitled “Fortune favours the brave”.

Investing in stocks on the Borsa Istanbul truly is a matter of bravery right now. Turkish and global risks are multiplying and intensifying. On March 2, the Turkish capital markets board (SPK) extended its short-selling ban imposed on all stocks on February 28 until further notice.

Investors in Turkey have grown accustomed to such interventions since March 2019. They are no longer much of a surprise. Stock traders intent on being courageous must take them in their stride.

“Concerns about global growth and the coronavirus are bad for global risk appetite, but that also paves the way to high liquidity and a low interest rate environment for longer, which would be positive for Turkey,” Tuzun said.

Commenting after the March 3 G7 coronavirus statement that led to a dip on Wall Street stocks, and before the Fed’s emergency 50bp rate cut that sent the same stocks bouncing upwards before the rally quickly fizzled out, Jennifer McKeown of Capital Economics remarked in a note to investors: “The G7 statement falls short of hopes of a coordinated policy response and raises the risk that central banks will disappoint markets’ expectations in the months ahead. The statement that G7 countries are committed to ‘use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks’ and that central banks will ‘continue to fulfil their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system’ adds little to what we had already heard from national central banks and governments. This is a disappointment compared to previous hopes of an immediate and coordinated fiscal package and interest rate cuts, although such hopes had already been dampened by information leaked from ‘G7 officials’ early this morning,”

She added: “Targeted fiscal measures will almost certainly be forthcoming in any case—a boost worth 0.2% of GDP has already been unveiled in Italy, we expect the UK Chancellor to announce extra tax breaks and support for the NHS in next Wednesday’s budget and the US is reportedly close to agreeing $7.5bn (0.04% of GDP) in emergency spending to fight the virus.

“Central bank action is more controversial given doubts over whether it will be effective. Interest rate cuts cannot make factories produce more if they are unable to source vital inputs from virus-hit countries. Similarly, monetary policy loosening is unlikely to stimulate consumer spending in the near term if consumers are afraid to leave their homes. But offering tax breaks and cheap loans to companies, governments and central banks can at least tide them over a difficult period and help to limit any layoffs which would make the effects of the virus last longer. Furthermore, interest rate cuts might help to buoy financial market sentiment and prevent a further unhelpful tightening of financial conditions.”

Capital pencilled in 50bp of rate cuts by mid-year in the US and 20bp in the eurozone, plus cuts of 10bp and 25bps respectively in Japan and the UK within March. On those assumptions, and riding on the hope that the virus does not trigger mass layoffs or intense financial instability, Capital concluded that the damage to global GDP growth would be severe but temporary.

March 3 also brought an interesting Reuters coronavirus story as regards Turkey.

It quoted some unnamed foreign investors as saying that they had cancelled trips to Ankara scheduled for March 4-5 for the attendance of Turkish central bank investor meetings. Some foreign investors were, on the other hand, already in Turkey with the cancelled trips mainly due to company policies or personal concerns over global airports amid the coronavirus outbreak, Reuters noted.

Suffice to say, any investors turning up in Turkey should rather bring autopsy masks rather than the standard issue masks designed to help wearers avoid breathing in CORVID-19.

VTB, meanwhile, said it saw the USD/TRY rate at 6.80 by end-2020 and producing an average of 6.38 across this year. The TRY strengthened to 6.08 after the FED’s emergency hike, having hovered at around 6.20 in early day trading.

Julian Rimmer at Investec said in a March 2 note: “Turkey has bombed the living bejeezus out of [Bashar al-Assad] regime forces in [northwestern Syria] in the last few days...  The Russians have stepped back and allowed this to happen... At the same time Weirdogan is weaponising refugees and really turning up the crank on the EU to back him or face another crisis like the one in 2015. It's a high stakes game he's playing and I don't think he's in control. The lira remains highly frangible,”

“The meeting between President [Recep Tayyip] Erdogan and Russian counterpart Putin expected to be held on March 5th will bear importance. Should the parties reach an agreement at this meeting, the Turkish markets could recover strongly,” according to Seker Invest’s strategy note for March.

The key fundamental risk for Turkish equities is a major spike in interest rates to above 20%, from the 11-12% levels that currently prevail in Turkey, according to VTB. It also noted “the obvious geopolitical risks and regulatory pressures on the banking sector”.

The investment bank added: “Turkish banks face regulatory risks ‘from time to time’, but especially at times of high profitability, which makes us concerned about new negative surprises. In fact, we have already seen fee income regulations, without which our 2020F and 2021F net income forecasts would be 5% higher on average and some penalties on banks due to their insurance operations. There is also a potential risk of a Competition Board investigation (on interest rate fixing and similar collaborative actions of banks) which might result in fines.”

“The Turkish regulators have imposed new measures to be effective from 1 March 2020, eliminating and capping various fee and commission items for the banking sector. It is difficult for us to assess the hit to the overall fee income potential unless banks provide some guidance, since we do not know the details of all the fee and commission items... Turkish banks increased their net fee income 34% YoY in 2019 and this was the main supporter of net income last year. The growth was particularly strong in loan-related fees (cash + noncash loans), at 54%, and in insurance, at 79%... In fact, the regulatory pressure was specifically targeted to these two areas.

“Some banks already faced penalties for their insurance products and fees, and many fees and commission were cancelled particularly in corporate loan (including non-cash) fees. Thus, those with higher mix of insurance and loan fees (cash and non-cash) are likely to be impacted more... Vakifbank, by far, had the largest total mix of insurance, cash and non-cash loan fees in 2019, and thus is the most likely impacted one from the new regulations. Garanti and Akbank, on the other hand look safer. However, their higher payment system mix is also going to be a problem, as merchant fees are mostly a function of interest rates, and the average interest rate in 2020 is going to be lower than in 2019.

“Turkey’s ‘proactive’ foreign policy comes with its market-disturbing outcomes, and most recently the tension escalated in Syria with several casualties among Turkish troops inflicted by Assad-backed forces, which also caused tension between Russia and Turkey. This, together with Turkey’s involvement in Libya, in the Mediterranean, and the long-lasting saga of the Halkbank [Iran sanctions-busting] case in the US, mean no shortage of geopolitical risk factors for Turkey. Saying that, the historical sell-offs after geopolitical risk concerns in the market have proved to be short-lived and buying opportunities in the past several years. As we have always argued, as long as the geopolitical risk factors do not lead to Turkey being sanctioned economically, these developments or newsflow are unlikely to change the fundamental investment case for Turkey…”

VTB observed that Akbank’s main company-specific issue was its Otas credit. “As of the 4Q19 financials, Akbank’s net remaining exposure stood at a total of TRY 7.2bn (USD 1.2bn). Akbank’s indirect stake in Turk Telekom shares is 19.6% (a 35.56% stake in LYY which has a 55% stake in Turk Telekom), and the current value of these shares is TRY 5.7bn (as of 28 February 2020). Therefore, at Turk Telekom’s current market price, there is a shortage of TRY 1.5bn, which is around 2.7% of Akbank’s book value and 13.7% of its 2020 pre-tax income,” it said.

After Akbank, Garanti has the second largest exposure to Otas credit, but Garanti’s exposure is around 62% of Akbank’s, VTB said, adding: “Garanti’s total net remaining exposure stands at a total of TRY 4.5bn (USD 750mn). Garanti’s indirect stake in Turk Telekom shares is 12.2% (a 22.13% stake in LYY which has 55% stake in Turk Telekom), and the current value of these shares is TRY 3.6bn (as of 28 February 2020). Therefore, at Turk Telekom’ current market price, there is a shortage of TRY 0.9bn, which is around 1.7% of Garanti’s book value and 6.9% of its 2020 pre-tax income.”

VTB also noted that Unicredit has finally left control of Yapi Kredi to Turkey’s Koc Holding, selling its 9% stake to Koc as of November 2019. This followed Unicredit’s sale of an 11.9% stake in Yapi Kredi in the market at a share price of TRY2.88 on 6 February. “Unicredit still has a 20% non-controlling stake and is likely to sell this in the market. This leaves a share overhang risk on Yapi Kredi shares,” said VTB.

Looking at state lender Halkbank, VTB said it “has a unique risk in regards to the ongoing court case in the US, amid alleged financial actions against the US sanctions on Iran, several years ago. This case is widely seen as ‘political’, and thus Halkbank’s stock price has been sensitive to newsflow regarding US-Turkey relations.”

“As the other listed state bank in the equity market… risk for Vakifbank, as much as for any other state bank, is the state influence on lending, which might potentially cap earnings potential,” VTB added.