ECONOMY

Turkish stock market trailing regional rivals

ISTANBUL – Turkey’s stock market is faring worse than other emerging markets in the region, which investors are blaming on politics, oil and its neighbor Iran, though they expect the downturn to remain for the time being. Turkish stocks have risen 10 percent this year compared to an overall rise of 22 percent in emerging markets and a 49 percent rise in oil producer Russia. Turkish stocks rose more than 50 percent in 2005, the year Ankara started European Union entry talks, compared with a rise of 30 percent in emerging markets generally. Despite last year’s strong rise, it is still cheaper than Poland, Russia, South Africa and Egypt on a price to earnings basis, according to Morgan Stanley data. But investors say the downturn compared to other markets in Europe, the Middle East and Africa is taking place for a reason. While some emerging markets are oil and commodity exporters, such as Russia and South Africa, Turkey is a net importer, making for a huge current account deficit, which worsens its risk profile as compared to rival markets. A huge current account deficit was one of the triggers of Turkey’s 2001 financial crisis. Some equity analysts and fund managers are also concerned about the impact on Turkey of Iran’s nuclear quarrel with the West and possible military action. An escalation in violence by the rebel Kurdistan Workers Party (PKK) and talk of Turkish soldiers preparing to enter northern Iraq in search of guerrillas is also weighing on the market, Turkish and foreign analysts said. «With the current account deficit still growing and the potential for further fiscal slippage, plus the risk of a flare-up in both the Iranian and the PKK situations, I do think that there will continue to be a discount,» Jonathan Toub, fund manager at F&C Asset Management, said. The Iranian risk could be overstated, but Merrill Lynch analyst Michael Harris notes: «If you’re looking at who is going to be negatively impacted, Turkey has to be high on the list, in terms just of perceptions, geographically.» A recent struggle between the Islamist-rooted government and the president over who would head the central bank, a cut in VAT and talk of early elections, which could lead to a lack of fiscal discipline, were also factors and some investors expect more political noise ahead. «People started focusing on local risk…and in Turkey there were some identifiable events,» a London-based analyst said. In recent weeks, global liquidity has been dented by monetary tightening in Japan and the US, which makes emerging market investors more vulnerable to risk. Some 70 percent of Turkey’s free-float is owned by foreigners. With trading volumes of around $1 billion (800 million euros) a day, it is also liquid as an emerging market. Oil-inspired switch For Turkey to outperform, oil prices will have to fall or, according to Liesbeth Rubinstein, fund manager at Schroder Investment Management, corporate earnings or interest rate cuts will have to surprise positively. That could prove tricky as April inflation was higher than forecast, crushing short-term expectations of rates falling from a current 13.25 percent. «The currency isn’t as cheap as it was and…the valuation argument isn’t as compelling,» said Rubinstein, who rates Turkey «neutral.» Oil exporter Russia’s stock market has been one of the best performers, although a recent survey showed it was seen by fund managers as the second most overvalued market after India, and oil prices will determine its future appeal. The unnamed London analyst said a fall in oil prices would pull money out of Russia into Turkey but a further rise in oil from the current level of about $70 a barrel would do the opposite. «Emerging European funds will be looking to increase their exposure to oil probably, and one of the more liquid markets you could take the money out of is Turkey,» he said. Locals seen lending hand Turkey’s advantages include the prospect of EU membership, a young population of 70 million and expectations of sustained economic growth, targeted at 5 percent this year. «Over the course of the next emerging-market cycle, it should be in a position to outperform, because we think that’s one element (sustained economic growth) that’s not going to disappoint,» Merrill’s Harris said. With a $10 billion (8-billion-euro) International Monetary Fund loan package, Ankara also has a strict set of conditions to stick to. Another factor will be the growth of a local investor base as Turks get richer and feel more confident holding Turkish assets. «Equity allocation in the (local) mutual funds is very low. They are not investing in equities. They are mostly investing in T-bills and bonds but this money will also come to the equity market and the equities market will also go up,» said CA-IB analyst Hanzade Kilickiran, who rates Turkey «outperform.» Estimates on how long that will take vary but it is not seen happening in the short term, and meanwhile Turkey will remain subject to foreign sentiment. «If the foreigners get scared, the market’s going to underperform,» the London-based analyst said.