ISTANBUL – Turkish stocks have fallen about 25 percent this year, more than any other mainstream emerging market, and some investors say the market now looks cheap and they expect a rally by the end of the year. According to Morgan Stanley data, Turkish stocks had fallen 26 percent on the year to date by the end of last week, compared with an 8 percent fall in emerging markets overall. Turkish markets tend to sell off sharply when global liquidity shrinks – as they did in 2006 – in part because of a gaping current account deficit which is largely financed by foreign investment. The market is some 70 percent foreign-owned and relatively liquid, making it vulnerable to global mood swings. The lira has a history of diving when risk appetite shrinks – the currency lost as much as 25 percent in 2006 – and investors balk at the impact of high oil prices on Turkey’s import bill. So far the lira is holding up, supported by its high interest rates. During this particular sell-off, the sector makeup of Turkey’s market has played an important role. Weighing heavily in the main index are banks, which are out of favor globally, while Turkey lacks the stocks investors want to own in a climate of rising food and energy prices, such as commodity stocks. The large listed conglomerates, Koc Holding and Sabanci Holding, also own banks. «Our view is that Turkey does look like exceptionally good value right now, unless… you go into a situation like 2006 or worse, where the currency devalues and rates have to go up to the highs of the last 12 months, and the economy is pushed back to a much slower growth scenario,» said Andrew Howell, equity strategist at Citi. After the recent slide, European Union candidate Turkey’s stock market is trading at 8.4 times 2008 earnings, according to Morgan Stanley, well below an emerging market average of 13.1. The central bank, which raised rates 425 basis points in 2006, has been easing since September, knocking 225 basis points off the benchmark rate to 15.25 percent. High rates bit deeply into growth last year, but this year the market forecasts GNP growth of 4.7 percent. «We would need to see the growth forecast cut in half and rates go up and even that would put stocks at fair value, not expensive,» Howell said, adding Citi’s GDP forecast was a more conservative 4.2 percent. He sees the main index at 55,000 points by year-end, 27 percent above yesterday’s level. The caveat is that while the market looks cheap, it may not have seen the bottom yet and analysts expect stock prices to remain choppy in the short term. Fund managers Aberdeen Asset Managers have been taking advantage of recent lows to buy. They particularly like Akbank, Turkey’s largest private lender, which is trading at nine times forecast earnings, and insurer Aksigorta. «We’ve been topping up on the weakness,» said Mark Gordon-James of Aberdeen’s global emerging markets team, which has a minimum investment period of four to five years. Growth risk Turkish markets have largely shrugged off a military incursion into northern Iraq aimed at separatist guerrillas, though some investors say a slowing of the country’s reform process as attention is focused on Iraq and a controversial measure on Muslim headscarves have weighed on asset prices. Another risk is growth. Fourth-quarter growth data are due on March 31, and will be closely watched after GDP growth slowed to just 1.5 percent in the third quarter, the lowest rate since 2002 when Turkey was recovering from a financial crisis. «The reason (for the underperformance) is that the economy is slowing down,» said Mark Robinson, head of equity research and emerging Europe strategist at Unicredit. «I believe the market has been too complacent on growth,» he said, noting also that the inflation-targeting central bank faces a dilemma over possible growth-boosting rate cuts as inflation is running at 9.1 percent, more than twice its target. Standard & Poor’s named Turkey and Hungary yesterday as countries which may have to hike interest rates if a long US slowdown shrinks risk appetite and therefore investment flows. But after weak growth in 2007 – when private consumption spending grew just 1.8 percent in the first nine months – some are more sanguine about this year. «It’s less vulnerable from an economic-cycle perspective… Domestic private demand will be higher in 2008 than it was last year and there are very few markets globally where you can say that,» said Merrill Lynch equity analyst Michael Harris. Harris also reckons Turkey could be one of the best performers between now and the end of the year, once investors feel brave enough to call the bottom of the market.