Tuesday 20 February 2018

Turkey in line for a 'peace dividend'

Turkey has been caught between slow growth in Europe, the EM downturn through to 2016, conflicts in Iraq and Syria and with its own Kurds, Erdogan's nationalism and recently with inflation from imported commodities.  

The stock market has lagged the EM recovery and the iShares ETF/ local market in USD is basically flat since inception. It's on 10-11x P/E and 1.6x P/B. Within that a few growth/ compounder names are on 20 something P/Es and the banks are on single digits. Halkbank is priced at a discount, but others are priced a little over book value. Halkbank's situation is complicated by a trial in the US related to Iran sanctions breaches but it is still growing domestic lending in 2018. 

With ISIS gone, hopefully the security situation can settle down and Turkey may enjoy a 'peace dividend'. The FX is cheap and offers a decent carry pick up over Euros, while inflation is likely to start to fall if the currency stabilises and the central bank would probably try and get rates down to 6% or so from the current 8%, the expectation of which should attract fixed income portfolio flows. Receiving rates should be a fairy high Sharpe ratio trade. The FX is normally OK until after the summer where the tourism revenues drop off and that had in recent years been the catalyst for a devaluation. With the Euro having been strong against the USD and the Ruble also recovering, a flat USDTRY rate represents a further devaluation. 

If equity investor perceptions change and they perceive Turkey as a large, relatively high growth country with a cheap currency on the outskirts of Europe then the market as a whole and the banks should reprice higher. 

Turkish companies should also benefit from any rebuilding in Syria and there are many in the constriction/ aggregates sector that will be well positioned despite the complicated political situation in the border region. Perhap's Turkey's border incursions are more about positioning the ethnic Turk Syrians for the coming government negotiations and ensuring Turkish companies are benefitted from the economic recovery and spending than anything broader, whilst also trying to prevent emboldened Kurds from trying to change the siutation within Turkey. 


 Chart Sources: variously FRED, ycharts.com, MSCI.

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