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on May 22 to levels testing 150,000. It is not possible to explain the huge gain recorded in Turkish banking assets with economic fundamentals. It is, on the other hand, possible to see a clear case that it is frequently possible to find high-risk gains that stem from the manipulative, short-term policy making that the Erdogan administration, in political trouble following electoral setbacks, has increasingly turned to in its battle against the economic turmoil that has beset the country since the currency crisis that hit Turkey almost a year ago. One consequence of that strategy is that the Turkish lira (TRY) has hovered in the 5.60-5.70 band across the last month despite consecutive shocks, after hitting 6.25 at the beginning of May.
The government has been using all its means to keep the local currency under control but observers should not overlook how Turkish assets are still subject to a solid set of risk factors, ranging from the end of the US Congress summer break on September 9 to the melting FX reserves of the Turkish central bank. It is also notable how the shifting of investments to exporters has not been driven by the economic fundamentals. In 2018, Turkey’s overall exports rose by only 7% y/y to $168bn despite the huge deterioration of the local currency, and that was mainly due to a 4.2% y/y decline in the export unit value index. In January-May, Turkey’s exports rose by 5% y/y to $73bn. Similar anomalies in reasoning are seen in the sharp falls presented by the official consumer price index (CPI) inflation figures with deteriorating domestic demand also in the picture, although Turkey’s inflation is mainly cost-side, not demand-side. The economic slowdown in Turkey’s largest export market, the EU, along with the worsening global trade war do not provide the grounds that are alleged to exist for a bright outlook for Turkish exporters while even signs of a forthcoming less than expected interest rate easing by the US Fed this week could trigger a tumble in global markets, while a dramatic easing could indicate a sharp slowdown in the world economy. However, where Turkey’s concerned, we are talking about a highly speculative market as observed by the rating agencies, and high-risk profits are on the table. Union Investment has cut its exposure to Turkish banks “because it had good profit on the position,” while it reallocated its investments toward underperforming exporters, Ekaterina Iliouchenko of the fund told Bloomberg.
Sisecam, Turkish Airlines, Erdemir. Union also sees Turkish non-financials like glass manufacturer Sisecam, Turkish Airlines and steel maker Erdemir as “looking more attractive,” according to Iliouchenko. Pzena, meanwhile, has bought “a bit” of Turkish stocks with a focus on exporters across the last quarter, Allison Fisch of the investment fund told the news agency. Pzena has been looking for ways to increase its exposure to Turkey’s non-financial sectors to take advantage of the disparity compared to non-Turkish peers, according to Fisch.
Anomalies, or consecutive scandals, in Turkey have been successfully normalised and, according to Cagdas Dogan of BGC Partners, last week’s 425 bp rate cut by the central bank—the biggest in at least 17 years—may not be a big problem for Turkish banks as long as policy rates are cut in a way that “doesn’t create too much pressure on the lira.” The catalyst in shifting investment positions in the Turkish equity market to non-banks “may” be second-quarter earnings, Toygun Onaran of Oyak Securities told the news service. Oyak Securities forecasts Turkish banks’ profits to decline by 39% y/y in Q2 due to higher swap costs, a lower contribution from index-linked bonds and a lack of reversals in provisions versus an estimated 4% y/y increase in non-bank sectors’ overall profits. Just as the 39% y/y tumble in banking sector profits does not explain the huge jump in banking stocks, a 4% annual rise in non-bank profits does not seem satisfactory to explain the interest in non-bank stocks, given Turkey’s 5-year credit default swap (CDS) premiums hovering around 350s. The driver here seems to be that the Turkish banking index has reached its upside limits, the 150,000 level, and, now, proportions in the portfolios that are allocated for speculative assets are being canalized to lagged-behind non-bank stocks. Based on this logic, exporters are comparatively more attractive, given the collapse in domestic
52 TURKEY Country Report August 2019 www.intellinews.com