Range bound trading for the past three months... Following a 12% rise in January 12, Turkish equities have been stuck in a tight range between 58k and 63k for the past three months. While excess liquidity limits the downside, deteriorating inflationary outlook, persistent C/A deficit worries and perhaps more importantly, the fatigue in investor sentiment amid negative news flow from Europe capped the upside potential. MSCI-Turkey has risen by 21% YTD, outperforming MSCI-EM and MSCI-Russia by 8%.
Potential revision in earnings estimates: - Upward revision in non financials is likely, but it is difficult to judge the direction for banks right now. We have witnessed a 4% upward revision in banking sector consensus earnings estimates as indicated by Bloomberg since January 2012. While Garanti Bank and Akbank's 1Q12 earnings have been somewhat above estimates, further upward revision appears to be difficult at this stage as NIM expansion is hard to achieve and loan growth remains under pressure. As for non-financials, strong TL is certainly good news for companies with short net FX position and better than expected top line performance in 1Q12 leads us to believe that upward revision to the earnings estimates are in the works.
Weak European growth: European Central Bank's LTRO program has resolved the European banks' liquidity problem but economies are still struggling to grow given the austerity measures. The risk from Turkey's perspective is two-fold. The first one is fundamental; if European growth problems take a turn for the worse, the good start to the year in export performance may start to falter in coming months, highlighting the C/A related problems once again. The second and more sentimental issue is that the ongoing selling pressure in European banks which own 36% of the Turkish banking assets, do not bode well for the bank dominated Turkish market.
Equity supply: Equity offerings have been largely put on hold but potentially large deals such as Citibank's stake sale in Akbank or Finansbank's much desired SPO as well as smaller deals such as Teknosa may soon come to the market. Potential positive surprises... Oil price is certainly a key parameter for Turkey, which imports 97% of its petroleum need. Concerns on global growth but, more importantly, the talks between Iran and developed nations on May 23 may remove some of the supply related pressure on oil price. Another important but not so imminent positive surprise could be on the inflation front. CBT's renewed commitment to tighter monetary policy is good news for TL. A lower than expected oil price combined with strong TL may provide the much needed support to CBT's inflation target, perhaps pulling the year end estimates to around 7% later in 2H12 (BGC 12YE estimate: 8.4%)
What to do... Strong TL and declining long term yields are hardly bad news for equities. 10- year Turkish government bond yields declined by 54bps to 9.16% over the past month (We use 9.50% as risk free rate) As for absolute performance, we maintain our 12-month target level for ISE-100 at 67k but expect the market to remain in 58-63k range in the near term. We would be buyers should the market drop to around 56-57k, corresponding to around 9.0x PER. We believe that it is hard to justify a PER of above 11.0x for Turkish equities (currently at 9.6x 12E) because once the risk appetite vanishes Turkey will be again on the fore front posing as a risky bet among its peers. As for relative performance, we continue to believe that Turkey will outperform MSCI-EM in 2012, albeit in single digit territory. We recommend a neutral stance between banks vs non-financials in the near term and expect good stock picking as the key tool to outperform ISE-100 once again. We particularly like Emlak REIT, Tekfen Holding and Turk Traktor in this environment. Our Long-only portfolio has risen by 25% YTD, outperforming ISE-100 by 10%.