Tellimer

Turkey Strategy: It’s all about monetary policy once again

  • The CBRT returning to unorthodox monetary policies and low reserves have not helped the Turkish lira.
  • The market is now trading at 9.1x 2020 P/E (Ata coverage), at a 39% discount to EM peers.
  • We take stock of our top picks, which include: Arcelik, Erdemir, Migros, Turk Telekom, Tofas and Sisecam.

Once again, unorthodox monetary policies by the CBRT and how it has managed its reserves since the past year, have led to a massive Turkish lira devaluation (47% y/y against US$ and 56% y/y against Euro). The CBRT has fallen behind the curve yet again in sterilisation of the massive increase in money supply as a result of extraordinary growth in domestic credit while fruitlessly trying to defend the Lira — a 2018 deja vu. The 600bps back door rate hike so far since August has not helped the demise of the Lira.

Now with a new governor at the helm for the second time in 15 months, we need a credibility restoring action from the CBRT and hike rates to avoid a spike in inflation as the current pace of TL devaluation will inevitably have a pass-through to core and headline inflation. Turkey might need to go through another current account adjustment period as in 2019 to help stabilise the Lira that will only be helped via a tight monetary policy. The main source of funding of CAD so far in 2020 has been through the Central Bank’s reserves (gross reserves are down US$36bn year-to-date). On the other hand, increasing budget deficit due to Covid-19 impact has increased roll-over of domestic debt, while foreign investors have been net sellers of local currency debt since 2019 (-US$11bn). Although we do not see a problem for the short-term re-financing of foreign debt over the next 12 months, Turkey needs to start attracting capital once again if it is to continue to grow sustainably in the coming years.

2020 has become an interesting year so far in terms of equity performance, as the blue chip BIST 30-index underperformed the broader BIST-100 by 10% year-to-date. Banks, conglomerates and commodity names were all laggards, while food retailers and consumer discretionary were the main outperformers. Local investors have become a  more dominant force in 2020 absorbing the US$5.8bn sale by foreign investors year-to-date, as lack of meaningful returns in historically preferred interest-linked assets made equities popular. The market is now trading at 9.1x 2020 P/E (Ata coverage), at a 39% discount to EM peers.

Positives 

  • At 9.1x 2020 P/E (6.8x Bloom. Cons.), market is at 39% discount vs. MSCI EM compared to a 5-year discount of  38% 

  • Turkey’s strong manufacturing base and a more competitive currency are helping to gain some market share in different sectors in the post Covid-19 global trade dynamics  

  • Any return of appetite by foreign investors could give a strong boost to equities due to their underweight positioning and Turkey’s already low weight in MSCI EM 

Risks

  • High inflation compared to EM peers continues to be the achilles’ heel of Turkey’s macro and returning to single digits could take time. 

  • A collapse in tourism revenues and lack of international funding are once again pushing CA deficit to high levels that is currently being funded by CBT reserves, which could lead to further weakening of TL. 

  • Foreign investors lack of appetite for TL denominated government debt will limit the banking system’s ability to finance both loan growth and public spending going forward, hindering economic growth potential. 

Top picks: Preferring non-financials exposure to Turkish equities

Our key theme for Turkish equities for the next 12 months will be for companies that have been heavily punished from weak TL and those will benefit from rebalancing of the domestic demand, but also having export capabilities. We also focus on the companies which have specific stories and competitive advantages in Turkish Equities universe. We are also constructive about commodities such as steel on the back of global recovery in 2021.

Our top picks list include: Arcelik (ARCLK TI), Erdemir (EREGL TI), Migros (MGROS TI), Turk Telekom (TTKOM TI), Tofas (TOASO TI) and Sisecam (SISE TI).  

We remove Dogus Otomotiv (DOAS TI) from our top picks list.  Since 22 October 2019 when we had added DOAS to our top pick list, the stock has outperformed BIST-100 by 135% y/y ytd (%197 in nominal terms). Although we believe that the stock remains attractive with its 2020e and 2021e P/E multiples of 4.5x and 5.6x, we remove it from our top pick list since we believe the recent rally could lose steam with an impressive 3Q20 reflected mostly on share price. We expect EBITDA and net income to decline by 11% and 21% y/y, respectively, in 2021e. Having said that, we maintain our "Outperform" rating for DOAS as we revised up our 12M TP to TL30 (from TL27 previously). 

 

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