Analysis: Supercharged Turkish stocks rally not everything it seems

Iskenderun Demir Ve Celik

25/11/2021 14:30

By Canan Sevgili and Berna  Suleymanoglu
    Nov 25 (Reuters) - The lira's plunge has propelled Turkey's
exporter-dominated stock market to its best month in 12 years,
but for foreign investors, who have just started dipping their
toes in again, it's a very different story. 
    The stock rally, taking in exporters such as steel producer
Iskenderun Demir (Isdemir)  ISDMR.IS  and glass maker Sısecam
 SISE.IS , has seen Istanbul's $37 billion main bourse  .XU100 
soar nearly 20% in November, which is almost as much as the lira
 TRYTOM=D3  has slumped.
    Emerging economy stock markets often surge when their
country runs into trouble because locals see equities as a
relatively safe asset as companies either ramp up prices to
offset spiralling inflation or benefit from a weaker domestic
currency if they export overseas.
    Big money international investors are in the opposite
situation though. They usually have to convert whatever they
hold back into dollars or another major currency, meaning they
see a huge fall in value.
    MSCI's dollar-denominated index of Turkish shares
 .dMITR00000PUS , for example, slumped 9% during Tuesday's
brutal lira rout, by which time it was down 20% this month and
30% since the start of the year.  
    The currency slide - triggered by an unorthodox policy
promoted by President Tayyip Erdogan of slashing interest rates,
in the hope of boosting the economy and jobs, while inflation
hovers near 20% - has at least left Turkish shares historically
cheap and for some investors, a useful hedge against losses
elsewhere. 
    "The main reason for all-time highs in lira terms is the
sharp (lira) depreciation ... and ... exporting companies'
spectacular stock returns," said Doruk Ozaner, fund manager at
Istanbul Portfoy. 
    "When we look at the stock market in dollar terms (it) is
very cheap historically," Ozaner added.
    Refinitv IBES data shows the MSCI Turkey Index’s
dollar-denominated price-earnings (PE) ratio now stands at 5.4,
well below its equivalent for emerging market peers at nearly
13.    
    
    PROFIT SURGE
    Many Turkish exporters are benefiting from the lira's slump
coupled with the world economy's bounceback this year from the
initial COVID-19 shock. Isdemir reported that third-quarter net
profit leapt 657% from a year earlier to 3 billion lira ($242.09
million), while Sisecam's third-quarter profit of 1.35 billion
lira beat expectations by 6.5%.
    It hasn't gone unnoticed. Foreign investors bought $384
million worth of Turkish stocks in the seven days ending Nov.
19, after recording their biggest weekly inflow in a year with
$480 million as of Nov. 12, according to central bank data.
Total net transactions of foreign investors stood at $1.14
billion in the first three weeks of the month.
    "Since foreign investors are getting cheap lira in the swap
market, they borrow and take positions in the market. I believe,
the central bank won't hike rates and will continue with rate
cuts. This is the new Turkish economic model; high inflation,
high (dollar/lira) levels, low interest rates," Ozaner said.
    The damage done by more than a decade of lira weakness -
Turkey's currency has nosedived nearly 90% since 2011 - is
clearly evident though.
    Bank for International Settlements data shows that nearly
20% of Turkish companies' revenues were being used just to make
interest payments at the end of March. Back in 2011 it was just
7.4%.
    For dollar-based international investors, MSCI's Turkey
index is also exactly where it was after the major lira crisis
in 2018 when worries about overborrowing and poor relations with
the then Donald Trump-led U.S. government hit hard.
    MSCI's main world share index  .MIWD00000PUS  which includes
50 countries is up 50% over that same period.
    Emerging markets strategist at SEB, Per Hammarlund, thinks
caution is therefore still required, especially if the currency
crisis escalates, triggering emergency rate hikes or even
capital controls which would prevent investors getting their
money out.
    "At that stage the stock market would look overvalued even
if it looks cheap now," said Hammarlund. "This economic
experiment is bound to fail I think." 
   


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Lira's woes have left Turkish stocks out of global rally    https://tmsnrt.rs/30TtJ72
Turkish companies' debt to service ratio    https://tmsnrt.rs/3FLV75N
Turkish firms look cheap in dollar terms    https://tmsnrt.rs/3xhlcXq
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 (Reporting by Berna Suleymanoglu, Canan Sevgili and Halilcan
Soran; Additional reporting by Marc Jones in London; Editing by
Jonathan Spicer and Susan Fenton)
 ((canan.sevgili@thomsonreuters.com;))