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July 7, 2017 www.intellinews.com I Page 3
Add to those anxieties Ankara's ongoing spats with the EU over its receded prospects of membership, the jailing of journalists and seizing of businesses, the massive purges against anybody and everybody allegedly associated with the Gulenist network the government claims was behind the failed putsch, and rows with Washington over the arming of Kurds in the Syria conflict – it is easy to see why Erdogan might have felt the need to flood the veins of the economy with loose credit, tax cuts and other stimuli. But, for now, it's paying off.
GDP growth recovered in the first quarter to 5%, springing back from a drop of 1.3% just two quar- ters ago, while Turkey’s calendar-adjusted in- dustrial production index moved up by 6.7% y/y in April, marking the best growth in output recorded in 20 months.
Government balance sheet to the fore
By June 30, the BIST-100 had a market cap of $180.8bn versus the Russian MICEX's $473.1m, while its price/earnings (p/e) ratio was 9.3 in 2016 versus the latter's 6.3.
In a joint response to bne IntelliNews' questions on exactly what is driving the Borsa Istanbul, two representatives of Renaissance Capital – Daniel Salter, head of research, Eurasia and Metin Es- endal, Turkey consumer and industrials analyst – noted that “the Turkish economy is picking up on the back of government efforts and subdued political uncertainty following the referendum”.
They added: “The government is using its balance sheet to support credit growth – via guarantees which have helped push FX-adjusted lending growth towards 30%. Government efforts including the introduction of the credit guarantee fund, the post- ponement of social security premiums, VAT/special consumption tax cuts in some consumer products, etc., have clearly helped both sentiment to improve and demand to pick up in the year to date.”
Turkey's Q1 2017 GDP data showed public con- sumption grew by almost 10% y/y and the coun- try's manufacturing PMI has been on an improving
trend since January (it broke through 50 into posi- tive territory in March and in June hit 54.7, its best level in 43 months), Salter and Esendal observed. Taking into account the mild under-valuation of the Turkish lira and expected GDP growth of at least 2-3% in 2017, “we think this means investors can find value in Turkey for now,” they added.
While many analysts have lately not seen Turkey's listed banks as compelling on valuations, the Renaissance Capital representatives view them as likely to beat the market expectation of 5% earnings per share (EPS) growth for this year as they assess their asset quality as much healthier than market expectations, and volumes outpacing management guidance.
Asked for an advisable trading game plan for
the BIST-100, they said: “We are selective in consumer and industrials as large parts of the non-financial sectors are trading on relatively full valuations. We see potential for upside in finan- cials in the second half, assuming a disinflation story plays out later in the year; currently we are still cautious. We like Sabanci Holding, Coca-Cola Icecek, Ulker Biskuvi, Yatas, Ulusoy Elektrik, and Lokman Hekim.”
Looking at the cheapness of the Turkish stock market as a big factor in attracting capital inflows, Renaissance Capital detailed how Turkey is the second-cheapest MSCI EM market on a 12 month forward p/e basis after Russia, and third cheapest on a sector-adjusted basis; the fourth-cheapest market in EMEA versus its 10-year average 12 month forward p/e, and one of only eight coun- tries in MSCI EM trading below its 10-year aver- age 12 month forward p/e.
Turkey, Renaissance added, is the fourth most overweight market among active managers in MSCI EM countries, while it has the highest 2017 three-month EPS revisions ratio in MSCI EM.
Forced on to the defensive
Another investment bank all too aware of the government's key role in lifting the Turkish