Turk assets seen a good buy on rate cut hopes
LONDON – A smooth end to Turkish elections and the likelihood of up to 300 basis points in interest rate cuts by end-2008 means the country’s stocks and bonds are poised for big gains in the coming year, a fund manager with HSBC Asset Management told Reuters. Namik Aksel, portfolio manager at HSBC Investments Turkey with $950 million under management, says the election of a pro-European Union and pro-reform government bodes well for the economy, despite the uncertain global financial picture. «I believe Turkey has entered a different stage and should outperform most of its peers. This week we decreased some exposure after the rally following the (Federal Reserve) rate cut, but we will increase exposure again when we see the next pullback,» he said. Turkey has some of the highest interest rates in the developing world, but a surprise 25 basis point rate cut last week fueled hopes the central bank has embarked on its long awaited policy easing. Aksel predicts 300 bps will be shaved off the current 17.25 percent rate by the end of next year. The rate cut and the Fed move drove benchmark lira bond yields to a year-low around 16.8 percent from 18 percent before. «Looking at the central bank behavior we are getting more bullish with respect to fixed income,» Aksel said. «We like the long end of the curve even though it’s rallied so far in recent days but there is still value – we were trading the five-year around 12 percent 14 months back and now we are at 16.5 percent so there is scope for gains.» The central bank targets 4 percent consumer inflation versus the annualized 7.4 percent rate in August. Aksel’s fund is for now split 65:30 fixed income to equities with the remainder in cash, but he says equities in the longer run will offer even better returns provided the easing cycle continues. Turkish stocks have risen 45 percent this year compared with a 27 percent year-to-date gain on the benchmark Morgan Stanley emerging markets index and some analysts say they are looking vulnerable to profit-taking. Aksel is betting on long-term gains in the property, cement and banking sectors. He cites Turkey’s mortgage lending take-up – the lowest in Europe and lower than many emerging markets. «We calculate price/earnings ratios as 10 based on 2008 earnings – the cheapest PE ratio in emerging markets after Brazil,» he said. «In terms of sectors, our No 1 pick are banks which have an average price-to-book of two times 2008 earnings and as interest rates fall, profitability should increase.» Garanti Bank, residential property Sinpas, refiner Tupras and conglomerate Koc Holding are his top picks. Aksel acknowledges Turkey remains extremely high-beta and vulnerable due to its large current account deficit. «If external factors get worse, Turkey may even be one of the worst hit,» he said. «But markets will recover faster because of the government’s willingness for structural reform, and a sell-off will probably be seen as a buying opportunity.»
