Turkish equity indices back in ‘Buy into weakness’ territory says VTB

Turkish equity indices back in ‘Buy into weakness’ territory says VTB
By bne IntelliNews December 4, 2019

“There is more room to go” in rising Turkish bank share prices “but that will likely only materialise in early 2020”, VTB Capital analyst Akin Tuzun wrote in a December 4 note entitled “Winter is not coming”.

The Russian investment bank advised last month that they were expecting a 10% rise in Turkish banks in November and they delivered 9.6% on strong earnings.

“Equity indices [on the Borsa Istanbul] are in ‘Buy into weakness’ territory. The sell-off in October pushed the main and banking index back into ‘Strong Buy’ territory, but now we are back in the ‘Buy into weakness’ zone,” Tuzun said.

Turkish equities reinstated their rerating trend in November, after a pull-back in October amid geopolitical risks, he added, noting: “The MSCI Turkey Index and MSCI Turkey financials index rose 7% and 10%, respectively, outperforming the EM space by 7% and 11%. The P/E re-rating of Turkish banks has mostly been completed based on the new COE outlook, but now it is time for earnings-based price uplift. The October banking sector data revealed the first signals of this earnings recovery, particularly for the state and foreign banks.”

Foreign institutional investors “reluctant”

Foreign institutional investors still appeared to VTB as “reluctant to increase their Turkey weights, as the year is almost over, but we expect some increase in positioning in December, in anticipation of larger potential long-only inflows as the new year starts”.

The analyst added that it expected the Turkish central bank to end its easing cycle, which has seen rate cuts amounting to 1,000 bp since July, with one final cut of 100-200 bp on 12 December. In Tuzun’s view that “would not … distort the stability of the Turkish lira, given the favourable global backdrop. We continue to recommend buying the market on weakness, particularly the banks.”

Turkey’s loan recovery remained on track with private banks’ participation, the note said, adding: “The loan recovery that started three months ago continues to maintain its pace, particularly in the consumer loan space. The three-month annualised consumer loan growth has now reached 46%, followed by lira commercial loans of 26%. The private banks have also joined the trend—particularly in the past two months.”

‘Locking in gains’

From another perspective, Bloomberg on December 3 reported on signs that foreign investors in Turkish stocks are locking in gains with fear of US sanctions being imposed on Ankara mounting.

In the first half, foreign investors were net buyers of $851mn in Turkish equities, according to central bank data, but outflows since the end of June exceeded $380mn as of November 22.

Non-residents' holdings of equity and government domestic debt securities ($ mn) (Market Value)
  2017 2018 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov So far 2019
Equity 51,984 29,563 35,260 34,684 29,339 27,995 26,382 28,832 31,345 28,727 31,589 29,485 31,907 31,907
GDDS 30,942 18,325 19,246 18,095 14,514 13,269 12,811 14,622 15,881 14,999 16,149 15,528 15,980 15,980
Repo 2,403 314 340 330 309 297 322 351 392 417 375 380 397 397
Private 959 612 591 501 543 489 473 492 465 440 453 388 377 377
NET TRANSACTIONS (Adjusted for Foreign Exchange and Market Price Effects)
Equity 3,191 -904 1,335 59 -517 -21 -196 192 -5 -418 163 -521 400 471
GDDS 7,278 -906 -329 -377 -868 -489 -540 131 235 7 79 -700 -258 -3,109
Repo 271 -1,391 15 -4 15 5 24 -8 23 41 -67 3 3 50
Private 42 -343 -21 -90 42 -53 -16 19 -26 -25 12 -65 -11 -235
source: tcmb

Turkey has lately tested radar systems for acquired Russian S-400 missile defence systems to the ire of many in the US Congress, while its invasion of northeast Syria continues to rankle with allies and officials in Washington. Sanctions—should US President Donald Trump allow them to be imposed against Turkish counterpart Recep Tayyip Erdogan, who he treats as a man he can do business with—could limit any gains in Istanbul stocks, leaving investors facing geopolitical risks disproportionate to their potential returns and the sanctions factor is being widely underestimated, according to Cristian Maggio, head of emerging markets at TD Securities in London, as quoted by Bloomberg.

Describing sanctions as “a big risk” made worse by a lack of visibility on their timing, he was cited as saying: “Sanction risks are not so relevant until they become relevant, and the frequency of news on the matter, the kind of statements, the perceived direction of diplomacy and many other, to some extent subjective, factors determine market implied positioning.”

The Borsa Istanbul’s benchmark BIST-100 index is among the five best-performing stock market gauges in the second half of this year, up 12% since the start of July. That doubled its advance in the first six months. Government steps including a ban on short selling helped during moments of geopolitical strain, while 1,000 basis points of central bank rate cuts since July and restored appetite among investors for risk assets have helped.

“To adapt a football analogy, it’s been a year of two halves,” Nigel Rendell, a senior analyst at Medley Global Advisors in London was quoted as saying by Bloomberg.

In the first half of this year Turkey faced a slowing economy following last year’s currency crisis, tense local elections that served up shock defeats for the Erdogan administration and the initial turbulence caused by the S-400 purchase. While government measures helped stabilise the lira, they have added to uncertainty over the longer-term outlook and added to the risk premium of holding Turkish assets, Rendell added.