“When you look at a cheap market, you wonder if it will go back to its historical average,” Marco Spinar, an associate portfolio manager at Neuberger Berman, said in an interview.
In Turkey’s case, the market could rally without ending the disparity, said Spinar, who helps oversee US$8bil in developing nation shares at the New York-based money manager, including Istanbul stocks.
The benchmark index climbed to an all-time high on Wednesday, with investors drawn by an upbeat outlook from some local banks, reduced Iran-US tensions and attractive valuations.
Turkish stocks trade at about 23% below their 10-year average price to earnings basis, with a gulf of 49% to emerging-market peers.
Valuations have lagged for more than five years, “frustrating” investors, Spinar said. The Turkish market has been battered in this period by the turmoil of three general elections, a local government vote, a referendum on the president’s powers, a failed coup, cabinet changes, terror bombings, a currency crisis, strained relations with the US and an economic slowdown.
The gap is set to remain “as long as Turkey has weak macro institutions,” said Spinar, who has a neutral stance on the market. He cited inflation and a weak central bank among the strongest negative factors.
“There has been a real change in economic policy for the worse that has made it tough to invest in Turkey,” Spinar said. “It’s a much unloved market. It’s very cheap. But we haven’t seen a real change in fundamentals, a return to a better-thought-out, more strategic economic plan.”
In July 2019, President Recep Tayyip Erdogan unexpectedly replaced central bank governor Murat Cetinkaya. His successor, Murat Uysal, has overseen 1,200 basis points in cuts to the key lending rate.
Shortly after the change, Erdogan told a closed meeting of his party’s lawmakers that he expected Uysal and other bureaucrats and politicians to toe the government’s line on monetary policy and his view that higher interest rates cause inflation.
A year earlier, Erdogan also drew investor criticism for appointing his son-in-law as economy czar, completing the gradual removal of a markets-friendly government economic management team.
Given their valuations and with a tailwind of a benign backdrop for emerging markets, Turkish stocks could outperform, even without any investor-friendly changes at these institutions, said Spinar. But the risks leave them “very vulnerable” to a sell-off or deterioration in sentiment.
Spinar’s Turkish holdings are concentrated in companies that he regards as having strong management and a good return on equity, including fashion retailer Mavi Giyim Sanayi Ve Ticaret AS, white-goods manufacturer Arcelik AS, and non-state lenders like Akbank TAS and Turkiye Garanti Bankasi AS.
Neuberger held a “constructive view” on emerging markets and expected another “reasonably good performance” in 2020, Spinar said. — Bloomberg
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