Page 56 - TURKRptJul19

has already eased to 18% levels from as high as 26%, and the current valuations of Turkish equities seem at best fair in the [cost of equity] context,” he added. Turkey continues to have the highest interest rates in the main EM universe, with a Central Bank effective rate of 24% and 5-year sovereign bonds yielding 17.3%. The Central Bank rate is now 8.3% above the latest inflation print of 15.7% as of June, which clearly indicates a rate cut at the upcoming MPC meeting, according to Tuzun. VTB expects a 150-200bp rate cut from the next Monetary Policy Committee (MPC) meeting to be held on July 25 and a total of 500bp over the remainder of the year. However, the current market rates such as the 2-year benchmark domestic government bond yield standing at 18% already factor in the rate cuts VTB anticipates from the central bank in H2. If the CBRT cuts rates by more than 200bp prematurely, it might well be negative for the markets and particularly for the lira, according to Tuzun.
Turkish equities trade at 7.2x forward P/E, the second lowest after Russia, and at discounts of 45% to global emerging markets (GEM) and 30% to EMEA. Turkey’s discount to GEM and EMEA has been widening visibly since the beginning of 2015, and has reached the record high levels of the past ten years. These nominal discounts look attractive in the historical context; however, when VTB puts interest rates into the context, Turkey does not look cheap. VTB calculates the implied fair discount of Turkey to the GEM and EMEA regions based on a weighted average cost of equity calculation for Turkey, GEM and, taking into account the respective weights of the countries in the MSCI indices. “The implied discount to GEM seems fair, but compared with EMEA, the implied fair discount is more than where is Turkey trading at the moment. Based on forward P/Es in the context of 5-year sovereign bond yields (as the risk-free rate), the Turkish equity market looks to be trading at a premium (Figure 17), while Turkish banks look fairly valued,” Tuzun also said. The Turkish lira has remained the worst performing EM currency YTD in 2019, after being the worst currency last year and also since 2013. “In fact, recent developments have been in favour of the lira: rising expectations of a Fed rate cut in 2019, the falling trend in inflation, the reversal of dollarisation of local depositors and the narrowing current account deficit. On the other hand, the widening fiscal deficit, lack of confidence in the Turkish Central Bank, and domestic and geopolitical risks continue to weigh on the lira,” he added.
Foreign ownership nearing highs again. In the past two weeks, the foreign
56 TURKEY Country Report July 2019 www.intellinews.com