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July 7, 2017 www.intellinews.com I Page 2
For the Turkish stock market, there's a new 'Dude' in town
Many portfolio managers had expected the Istanbul stock exchange to struggle this year with Turkey swamped by political troubles and battling to resist an economic descent, but Erdogan and the government have been working overtime to inflate credit and introduce various other stimuli that have fed through into the bourse's main index.
“They [the government] keep pumping the economy with so many incentives and as long as they do that, as long as the stimulation keeps on coming and the stock exchange is seen as cheap on emerging market comparisons, I
don't see any reason why the Turkish bourse will start underperforming in the short term,” a senior Istanbul-based stock analyst at a major international bank told bne IntelliNews.
His reflections came shortly after the benchmark BIST-100 index closed on June 30 at 100,440, little more than a hair's breadth from its latest all-time high. The recent historical peak put the index 29% up in the year to date, compared to the 15.2% fall in Russia's MICEX.
“Of course, it is nothing sustainable, it is just for saving the day in the face of economic pressures, and there will be a price to pay somewhere down the road. But nobody cares at the moment with possibly no threat for many quarters to come given that Erdogan will have his eye on growth and having no upsets before the 2019 general election,” he added.
The analyst said that one of his biggest concerns is that the government, by buoying economic growth with a TL250bn ($70bn) credit guarantee fund (CGF), is “giving away the asset quality of the banks”. Asked to outline his trading strategy, he
said “we'd have to say that 'defensiveness' is the first criterion, with other criteria being 'quality name' and ‘consumer-oriented'”.
“Long-term investor beware”
His sentiments, amounting to a caveat of “long- term investor beware”, somewhat reflected
a bulletin released by emerging and frontier markets specialist investment bank Renaissance Capital back on June 12. It stated: “Our constructive view on Turkey is only tactical... We emphasised [in May 2015] that excessive credit growth is Turkey’s key macro vulnerability. Private sector debt rose from 16% of GDP in 2001 to 69% of GDP in 2016, echoing what we have seen in Greece and Brazil. This is likely to end badly, in our view, just not yet.”
Ministers certainly face an unenviable set of woes in the struggle to maintain expansion in Turkey, weighed, among other things, by an absence of much-needed foreign direct investment. Foreign investors fear structural economic reform is taking a back seat and partly as a consequence FDI fell from 2007's record $22bn to $12.3bn last year. Other big difficulties include double-digit annual inflation (although in June it eased to 10.90% from 11.72% in May) and a substantially weakened Turkish lira, which has toppled from 2.83 to the dollar to as low as 3.94 in the past year, though it has lately been trading at closer to 3.50.
Erdogan, meanwhile, continues to rule by decree under a state of emergency introduced almost exactly a year ago after Turkey's failed coup attempt. After the country’s largest business association raised anxieties about its duration,
he defiantly declared, “The state of emergency will never end — not until there is peace and welfare in the country”. Also giving some investors the jitters when it comes to the security of investments placed in Turkey is the fact that the president, having narrowly won April's referendum on introducing an executive presidency, now has the authority to essentially control the executive, the legislature and the judiciary, with near-total judicial and parliamentary immunity.